Japan overtook China in February as the top foreign holder of U.S. Treasury securities, a position Japan last held in August 2008.
In its monthly report on bond holdings, the Treasury Department said Wednesday total foreign holdings of Treasury debt dipped 0.9 percent in February to $6.16 trillion, down from a record of $6.22 trillion in January.
The holdings of China, normally the top holder of Treasury debt, slipped 1.2 percent to $1.22 trillion. Japan’s fell 1.1 percent from January. China’s decline was a bit larger, allowing Japan to jump into the top spot, $700 million above China.
China overtook Japan for the top spot in ownership of U.S. Treasury debt in 2008 as the financial crisis and a deep recession pushed up U.S. government borrowing to finance government deficits. The U.S. deficit topped $1 trillion annually for four consecutive years.
Private analysts had been forecasting that Japan would surpass China’s holdings of Treasury debt this year given current economic trends in both nations.
China’s economy has been slowing and growth of its exports has been tapering, giving the country less to invest overseas. It has also been seeking to diversify those investments, leaving less to invest in U.S. government bonds.
The Japanese central bank, meanwhile, is engaged in an aggressive effort to boost the country’s money supply to bolster the economy and fight low inflation. That means there is more money to invest overseas. Japanese investors have been attracted to dollar holdings because of higher rates of return on dollar-denominated investments.
Sung Won Sohn, an economics professor at the Smith School of Business at California State University, Channel Islands, sees those trends continuing, with Japan’s holdings of Treasury debt growing faster than China’s.
“Economic growth and export growth are slowing in China and as a result China has less money to invest overseas, while Japan’s central bank is pursuing policies that will keep the Japanese yen weaker against the dollar and thus make dollar investments more attractive to Japanese investors,” Sohn said.
Japan’s holdings of Treasury debt are $13.6 billion higher than they were a year ago, while China’s holdings are $49.2 billion lower than a year ago.
China is also being pressured by the Obama administration to allow its currency to rise in value against the dollar.
American manufacturers have complained for years that China is manipulating its currency, keeping it undervalued against the dollar as a way to gain trade advantages. A weaker Chinese currency compared to the dollar makes American goods more expensive in China and Chinese goods cheaper for U.S. consumers.