China bought a record $7.9 billion in short-term Japanese debt in May, a surge widely viewed as temporary while sovereign debt concerns buffet the euro, rather than a shift in China's long-term investment stance.
But some analysts said the purchases may also be a sign of foreign reserves diversification into the yen and away from the euro and the dollar by China.
As a result of the latest crisis, it is possible that they may be thinking of diversifying a bit more rather than just sticking with the euro and the dollar, said Satoru Ogasawara, an economist for Credit Suisse Securities Japan.
In May, Chinese investors bought a net 694.8 billion yen in short-term Japanese debt -- a record high on data going back to January 2005, Japanese Finance Ministry data shows.
Coupled with net buying of 40.4 billion yen in medium- to long-term Japanese bonds in May, net buying of Japanese bonds out of China in January to May totalled 1.28 trillion yen, already exceeding an annual record of 255.7 billion yen logged in 2005.
They are probably increasing their investment in the yen somewhat. I think it probably includes, to a significant degree, moves to seek temporary refuge, said Akira Hoshino, chief manager for the Bank of Tokyo-Mitsubishi UFJ's foreign exchange trading department.
One issue is whether this is leading to a full-fledged change in asset allocation. But if that were the case, I think there would be some buying in the longer end, Hoshino said.
Analysts cautioned against reading too much into the numbers.
The purchases of short-term Japanese debt were small compared to the size of China's foreign reserves -- $2.4 trillion and investors in China were not the only ones that piled into short-term Japanese notes in May.
Total net buying of short-term Japanese debt by overseas investors hit a record 4.4 trillion yen in May led by buying by UK investors, who bought a net 5.5 trillion yen, the data showed.
Hoshino at Bank of Tokyo-Mitsubishi UFJ also said it was unclear just how much impact such buying of short-term Japanese debt has had on the yen, adding that some of the buying, in theory, could have been conducted while hedging against currency risk.
The Chinese buying of Japanese debt comes at a time when analysts say China has been shifting some of its foreign exchange reserves -- the world's largest stockpile -- into a wider range of currencies in recent months, including assets elsewhere in Asia and in commodity-producing countries.
Roughly a quarter is estimated to be held in euro-denominated assets, primarily sovereign bonds, analysts say.
There is a lot of money in various parts of the world with nowhere to go, and there are probably some moves to choose the yen in times like these, said Taisuke Tanaka, foreign exchange strategist for Nomura Securities.
Such moves are unlikely to be limited to China, he said. (Editing by Edwina Gibbs)