Opinion

Japanese bonds not bad assets

By Zhang Zhouxiang (China Daily)
Updated: 2010-08-12 14:25

If you take a taxi ride in some Japanese cities, you may see advertisements featuring Junko Kubo, a former female anchor on Japan's public broadcaster NHK. The ads simply read: "Government bonds are worth another look."

This is not the first time Japanese government bonds have made it to ads and billboards. As early as 2005, Japan's Ministry of Finance decided to promote its bonds. But when a big buyer has finally emerged now, many Japanese media outlets and individuals don't seem to welcome it.

Yuan Changjun, a research fellow in finance with the University of International Business and Economics

According to Tokyo's latest official data, China purchased more than 1.73 trillion yen ($20.1 billion) worth of Japanese bonds in the first six months of this year. That's a giant leap compared to the past: almost seven times the one-year record of 253.8 billion in 2005. And it makes China the second largest creditor to Japan.

But China's purchase actually has little impact on China, because the Japanese bonds make up a tiny proportion of Beijing's foreign exchange reserves: less than 1 percent of the total $2.45 trillion.

In the international bond market, Japanese bonds are not hot stock. Low interest rate and lack of liquidity have long made them unattractive to many buyers, including China. Though no official data is available, many scholars say the combined US dollar assets comprise most of China's foreign exchange reserves, while its assets in Japanese yen make up a tiny part.

Perhaps that's why this purchase has drawn the world's attention. Many Chinese economists are analyzing the gains and risks involved in buying Japanese bonds. And some Japanese doubt the real intentions of China in buying their country's bonds. One Japanese netizen even wrote an article: "Will Japan be fooled by Chinese hot money?"

Yuan Changjun, a research fellow in finance with the University of International Business and Economics has analyzed the advantages and disadvantages of purchasing Japanese bonds, and suggests China could increase some of its Japanese bond holdings in order to diversify its foreign exchange reserves.

Risk is always the first factor to be considered while making an investment. Many people have expressed concern over security, for Japan has the largest public debt among industrialized nations. According to the International Monetary Fund, its debt had reached 218.6 percent of its GDP last year, much higher than the 113 percent of Greece. Even Japan's new Prime Minister Naoto Kan has warned of the possibility of a financial mess, fearing it could turn Japan into another Greece.

But Yuan says the risks of Japan going bankrupt are not so high. Unlike the assets of the US and European nations, most of the Japanese bonds are held domestically. Foreign institutions and individuals hold only 4.6 percent of the total, while the percentage of British assets held by foreign entities is more than 30, and even above 40 for the US and Germany.

In fact, Japanese financial institutions have kept good their credits, with only a few uncollectible accounts, giving the country a firm financial footing, Yuan says. Besides, Japan has got enormous overseas assets, which add security to its debts.

Yuan's experience of doing his master's in Japan's Kanazawa University also helped him better understand the country and its people: "The Japanese have a very deep sense of crisis, and lay a lot of emphasis on potential risks." Therefore, he says, China should be aware of the risks, but not be over-cautious. At present, China is mainly buying short-term Japanese debts, which is not as risky as it appears to be. After all, Japan is different from Greece.

Interest is indeed the primary concern. The interest rate of Japanese bonds is very low compared with US and European bonds. The interest rate of 10-year Japanese bonds has fallen below 1 percent, while that of the US is still 3.6 percent. Besides, the value of the Japanese yen against the US dollar has been rising for a long time, and Tokyo may possibly take measures to depreciate its currency further to stimulate its economy. That is another risk of buying Japanese bonds - there is always the risk of the assets shrinking.

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But Yuan says China should see the affair in its entirety. The two other main financial products, the euro and the US dollar, have their problems, too. To cope with economic recession, the US has issued too many banknotes. It's almost like "dumping dollars from planes and helicopters", Yuan says. This will cause inflation in the long run, and those who have their assets in US dollars may see their holdings shrink.

Currently, China holds a large number quantities of US bonds. But it should not put all its eggs in one basket. The State Administration of Foreign Exchange, in charge of China's overseas investment, said in a recent press note that it would adopt a strategy to diversify its foreign exchange holdings in order to make its investments more secure. Now, when the Europe Union is suffering from a sovereign debt crisis, Yuan says, Japanese bonds are a relatively good choice, at least in the short term.

Another problem China may face if it buys more Japanese bonds is not purely economical. While Tokyo is trying to promote its debt sales, many media outlets in Japan have expressed doubts over China's real intentions, fearing that Beijing may sell the Japanese bonds it holds suddenly to "deal a big blow" to the country's economy.

But Yuan says the purchase of Japanese bonds by China should not be politicized. "Every investor seeks good returns." By purchasing more Japanese bonds, China will help propel Asian economic integration, and that would certainly be more beneficial to Japan.

Economic unity requires intimate communication and cooperation between two countries. And by buying more Japanese bonds China has taken a vital step toward bilateral cooperation.