Japan to buy $10.3b in Chinese govt bonds

Japan announced on Tuesday that it has won Chinese authorities' approval to buy 65 billion yuan ($10.3 billion) in Chinese government bonds.

The move will help Japan diversify its reserves away from the dollar and strengthen ties between the two largest creditor countries in the world.

The timing of the purchases has not been set yet. A few months of preparation will be needed for the completion of technical procedures before the Chinese bonds can be bought, Jun Azumi, Japanese finance minister, told a news conference in Tokyo, according to Xinhua News Agency.

"We will consider trends in the financial markets to decide on a right time for the purchases," Azumi said.

He also suggested the initial purchases would be in small amounts and take into account conditions in Japan's foreign-currency assets.

"We think this ($10.3 billion) is an appropriate amount when you consider our common goal of strengthening economic cooperation between Japan and China," Azumi told reporters.

In December, the two countries agreed at a summit to promote trade in the yen and the yuan, as well as to invest in each other's bond markets.

Japan's announcement on Tuesday marks the first time it has given public information about the quota for purchasing Chinese government bonds.

The announcement also came after Chinese central bank officials said on Monday that China and Japan have "great potential" to work together in the fixed income market.

Yi Gang, vice-governor of the People's Bank of China and head of the State Administration of Foreign Exchange, said Japanese investors are welcome to invest in the Chinese bond market and that China would continue to buy Japanese government debt.

"But a decision to increase the investments would be made after considering mutual benefits, and yen purchases would be reduced if Japanese concerns arose over the yen's appreciation," Yi said.

Among all countries, China and Japan hold the largest foreign-exchange reserves and are also the top purchasers of US Treasury bonds. Moreover, both are looking to reduce their exposure to dollar assets at a time that the US economy is wobbling.

Japan's purchase quota for Chinese government bonds is equal to only 0.7 percent of Japan's $1.3 trillion in foreign reserves. The country's dollar assets, in comparison, make up more than 70 percent of that portfolio.

Xu Wei, a researcher with the China Center for International Economic Exchanges, said the plan to buy yuan is only a beginning. In the long run, both countries are likely to try to move away from US dollars and to work more closely with each other, he said.

"Considering the deepening debt crisis in Europe and the weak recovery of the US, investing in China's government bonds would be a smart step for the Japanese government to take," Xu said.

"It could help solidify confidence in the Asian market and thereby benefit the global recovery," Xu said.

Meanwhile, Japan's plan to buy Chinese government bonds has helped ease appreciation pressures on the Japanese currency while the country recovers from the earthquake and tsunami that struck it a year ago, she said.

Xu also considers Japan's purchasing plans as a sign of progress toward China's goal of making the yuan an international reserve currency. He said Japan's example may prompt other countries to follow it.

Earlier in January, South Korea also said that it might invest part of its $300 billion in foreign-exchange reserves in yuan-denominated assets.

According to statistics, the average yield on investment in five-year US Treasury bonds was 1.41 percent last year, while the average return on Chinese government bonds with the same maturity was 3.52 percent.