Bonds to Finance Japanese Rebuilding; Won't Dump Vast Holding of Treasuries

The Washington Times (Washington, DC), March 31, 2011 | Go to article overview

Bonds to Finance Japanese Rebuilding; Won't Dump Vast Holding of Treasuries


Byline: Patrice Hill, THE WASHINGTON TIMES

Fears that Japan might start dumping some of its vast holdings of U.S. Treasury bonds to pay for earthquake reconstruction have eased in financial markets.

The Asian giant has signaled that instead it will finance the nearly $300 billion cost of rebuilding areas devastated by this month's major earthquake and tsunami by issuing bonds - a move that would add to Japan's already sizable public debt but pose little threat to U.S. markets.

The reassurances from Japan come as a relief to investors who shortly after the March 11 quake were bracing for massive sales of U.S. Treasury securities and a major exodus from U.S. markets. The panicky episode briefly drove the U.S. dollar to record lows below 80 yen.

But Japan's government quickly stepped in to quash the speculation - which was not only hurting prospects for the U.S. dollar and interest rates, but threatened to make it more difficult for Japan's export industries that depend on sales to the U.S. and are hurt by a rising yen.

In a coordinated intervention with the U.S. Treasury and several other Group of Seven industrialized nations March 17, the Bank of Japan moved to prop up the dollar and soften the rise of the yen - a step that appears to have sufficed for now to calm unnerved investors and markets.

We see limited likelihood of significant selling of U.S. Treasuries to finance rebuilding, said David Greenlaw, economist at Morgan Stanley.

The rare move by central banks to stem speculation after the quake - the first such coordinated action in a decade - and the threat of further action by the Bank of Japan will put a cap on the yen strengthening that roiled markets briefly after the quake, according to Morgan Stanley.

The Wall Street firm expects that the small amount of Treasuries sold by the Japanese government and insurance companies to finance reconstruction will not significantly disrupt U.S. or global markets.

Alex Jurshevski, analyst at Recovery Partners, agrees.

Japan has almost $3 trillion of net foreign assets [including $737 billion of U.S. Treasury bonds], but it is unlikely that it will liquidate these to support reconstruction, he said.

U.S. and European political pressure will more probably dictate that Japan finance this through an [easing of monetary policy], which will see the yen money supply pumped up in order to accommodate Japanese government-bond issuance, he added. …

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