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Japan may question China as to why it is lapping up large amounts of Japanese government bonds, said Japanese Minister of Finance Minister Yoshihiko Noda on Thursday.
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China bought $6.97 billion worth of Japanese financial assets in July, mainly Japanese government bonds (JGB), data from the Japanese Finance Ministry showed. Beijing had bought $5.3 billion worth of JGBs in June. This was on top of $20 billion worth of assets China bought earlier in the year. It is estimated that China's Japanese asset purchase so far this year has topped its combined asset buys in the last five years.
Japan is worried that China's yen-buying overdrive is hurting its economy, exports in particular, by contributing to the yen rally.
Talking to lawmakers on Thursday, Noda said he didn’t know the reason behind Beijing's increased focus on JGBs. "We are paying close attention," he said, adding that he would "closely cooperate (with Beijing) and examine its intention."
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China, which is sitting on a mammoth foreign exchange reserve of $2.5 trillion, has maintained that it is trying to diversify its forex holdings away from US dollar.
According to Chinese media reports, as much as 65 percent of China's forex holdings are held in U.S. dollars while yen's share of the basket currently is only an estimated three percent. Euro's share in China forex holding is estimated to be 26 percent and British pound holdings are thought to be about five percent.
At the end of May China held $867.7 billion of U.S. Treasuries, down from $900.2 billion in April.
Analysts think factors like yen's strength against the dollar, dwindling prospects of a quick U.S. recovery, concerns over the unchecked rise in U.S. debt, are all fuelling China's appetite for the Japanese currency.
Even a strongly worded statement by Noda on Wednesday didn’t stem yen's rise. "In the end when it becomes necessary, we will take firm action, including intervention," Noda had said, echoing previous his comments hinting at possible intervention.
The Japanese currency was trading at a 15-year high of 83.75 against the dollar on Thursday afternoon, forcing Japan to take action on the currency's inexorable rise. A Japanese government survey showed on Wednesday manufacturers had a dim view of the prospects in the coming months as growth slowed and yen stayed at levels too high for comfort.
The Bank of Japan has also said it would ease monetary policy further to stop yen's rise. Japanese government has frequently intervened in currency markets to weaken its currency, the biggest such intervention taking place in 2004 when it sold 35 trillion yen ($400 billion), the equivalent of more than a third of the annual budget, to try to stop yen's runaway rise and fight deflation. Japan has not meddled in the currency markets since then.
Meanwhile, China's own handling of its yuan is increasingly coming under the scanner in the U.S.
On Wednesday, Treasury Secretary Timothy F. Geithner repeated calls for a reform in China's currency policy. He said Beijing should act swiftly to reassure its trade partners that it's acting on the promise made in June to make yuan more flexible.
The latest trade data from two of the world's largest economies will show that the balance of trade stays skewed in favor of China. According to surveys, China's August trade surplus will top $20 billion while the U.S. is likely to report a deficit to the tune of $47 billion.
