Is it Japan to the rescue for U.S Treasuries?

01/14/2013 6:44 pm EST


Jim Jubak

Founder and Editor,

Nothing seems out of bounds for the new Liberal Democratic government of Shinzo Abe in its determination to blast Japan out of its most recent recession. Besides a huge extra budget emphasizing infrastructure spending and pressure to force the Bank of Japan to set a 2% inflation target that would guarantee massive monetary stimulus, the new Prime Minister is considering a fund that would buy foreign securities such as U.S. Treasuries. The fund could total 50 trillion yen ($558 billion), according to Nomura Securities. Buying foreign assets in that amount would be certain to further weaken a yen that has already dropped by 12% in the last four months.

Bond buying of this volume by Japan could also turn around what has been a falling market for U.S. Treasuries. Treasuries, as tracked by the Bank of America Merrill Lynch U.S. Treasury Index, have begun the year by falling 0.5%. The Federal Reserve’s purchase of $45 billion in Treasuries a month hasn’t been enough to make up for falling demand from China and Europe for the safe haven of Treasuries.

Economists, in fact, have been getting less bearish on Treasuries for 2013. The median forecast of economists tracked by Bloomberg is that the yield on the 10-year Treasury will climb to 2.27% by the end of 2013. That’s a big jump in yield (and remember bond prices fall as yields rise) from the current 1.86% yield. But it’s much more bullish than economists were this summer when in July the forecast, according to the Bloomberg survey, called for 2.7% by the end of 2013.

At the same time forecasts for the yen are predicting a weaker currency with the yen, currently at 89.45 to the dollar, falling to 95 or even 100 to the dollar.

Even without the latest plan from Abe, Japan is on a path to again become the biggest holder of U.S. Treasuries. Through October Japan had raised its holdings of U.S. Treasuries in 2012 by 12% to $1.13 trillion. That’s not far behind China’s $1.16 trillion and, with China cutting its holdings, the next report, due on January 16, could show that Japan is once again the United States’ biggest creditor.
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