Japan - $13b Japan boost for China's yuan currency

TOKYO - Japan will buy 65 billion yuan (S$13 billion) of Chinese government debt, the country's finance minister said yesterday, giving China a mark of approval in the credibility of the yuan as an international currency.

Other countries are investing in China through state agencies, but Japan's investment is by far the biggest in the yuan. As a currency with limited convertibility, such bets are symbolic of the shift in global power towards China as the world's fastest-growing major economy.

Despite sometimes-rancorous political ties between the two neighbours, Japan's economic fortunes are increasingly tied to China's economic growth and consumer demand.

China is already Japan's biggest trade partner and the two countries hold the world's biggest piles of foreign-exchange reserves - US$3.2 trillion (S$4 trillion) in China and US$1.3 trillion in Japan.

"For China, the move is linked to its efforts to internationalise the yuan - allowing foreign investments in its debt market will make the yuan more accepted internationally," said Mr Zhang Yongjun, an economist at the China Centre for International Economic Exchanges, a government think-tank.

Japan's Finance Minister, Mr Jun Azumi, said yesteron Tuesday that Japan had received permission from China to buy 65 billion yuan in Chinese government debt.

He said Tokyo needed to carry out some administrative steps in coming months before purchases could begin. "We feel this is an appropriate amount when considering our mutual goal of strengthening economic cooperation between Japan and China," Mr Azumi told reporters.

Japan and China agreed at a summit in December to strengthen financial cooperation and that included increased use of the yuan and yen in bilateral trade as well as Tokyo's buying of Chinese government bonds.

The Japanese investment will be handled outside of China's Qualified Foreign Institutional Investor (QFII) programme, a quota system and the primary channel for foreign portfolio investment, the Ministry of Finance in Tokyo said.

Japan is likely to buy a small amount of debt at first and then increase purchases while considering possible market impact when choosing the timing of the transactions, Mr Azumi added.

Mr Junya Tanase, chief foreign-exchange strategist at JP Morgan Bank in Tokyo, said: "The market impact should be manageable because the amount isn't that large and the market for dollars is huge."

Reuters

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