Chinese bonds expand Japan's financial resources

By Zhang Jifeng, January 3, 2012


Japan's Prime Minister Yoshihiko Noda visited China with a "great gift" – his country's purchase of US$10 billion Chinese government bonds. As the first G7 country who owns Chinese bonds, Japan's action is undoubtedly spurting the internationalization process of the yuan.
At the same time, People's Bank of China also issued a document providing advices and guidance to strengthen cooperation between China's and Japan's financial markets and encourage the two countries to expand financial transactions.
Financial cooperation is a trend
The financial relationship of China and Japan continues its stable development. China's opening-up policies brought it direct investments from Japanese companies with the Official Development Assistance (ODA). Chinese enterprises then started to invest in Japan and bought Japan's national bonds before the recent reciprocal actions from the Japanese government.
These strengthening financial ties are an inevitable product of the healthily progressing financial cooperation between Japan and China, who made the mutually beneficial relationship one of the most important items on its agenda.
As any economic activity is inseparable from the support of capitals and financial services, the guidance document from China's central bank became the natural result after the two countries' many negotiations.
The financial cooperation between the two countries also stabilizes their positions as the world's second and third largest economies, which are of great influences to the region and the world at large.
Buying China's national debt could enlarge Japan's financial resources
There are mixed opinions in China about Japan buying Chinese bonds. Some think that this is a new opportunity of the yuan's internationalization. Others think that this will increase the already rising pressure on the Chinese currency, which could lead to further rise of its foreign exchange reserves and increase China's pressure on inflation and other financial tensions.
Both concerns in fact make sense, because every financial event has two sides. But this event's advantage is bigger than its disadvantage to China and Japan.
Aside from being the second and the third economies in the world, the two countries are also the two biggest exporting countries – hence they own large foreign exchange reserves. Due to the US dollars' depreciation and the weakening euro, Japan and China's diversifying of their reserves by purchasing each other's bonds can spread risks.
The move also allows both countries to meet their individual goals. For China, the purchase of its bonds by the first G7 country expands global influences of the yuan. On the other hand, China's purchases of a large amount of Japanese bonds increased Japan's dependence on China, leading to concerns in Japan. The Japanese government satisfied its political demands and appeased its countrymen's nationalist sentiment by purchasing China's bonds.
Furthermore, Japan is in need of a huge financial infusion for its post-disaster reconstruction and to stimulate economic growth and counter the appreciation of the Japanese yen, so they need to expand its financial resources. With the two countries owning each other's national debt, Japan can seek the Chinese government to buy more of its bonds and to provide the financial support it needs.
Meanwhile, because Japan only purchased limited amount of debt and they bought it in batches, it only account for very small rate in China's foreign exchange reserves and won't have too great of an impact on China's financial market. So there is no need for China to worry too much.
Free trade agreements are on the way
China is Japan's largest trading partner, while Japan is China's second biggest. In recent years, trading between China and South Korea as well as Japan and South Korea have seen rapid development, deepening dependence among the trio. Still, there has not been any Free Trade Agreement or Free Trade Area (FTA) among them, although substantial progress is expected to be made on FTA in the next year.
With the deepening of international cooperation in the financial markets, there will be more foreign direct investment in the yuan from overseas investors, and there will also be more space for foreign companies to operate in the Chinese mainland. All of that will amount to a new upsurge for Japanese investment in China during Japan's post-disaster construction period.
Government bonds mark political mutual trust
Will Japan buy more Chinese bonds in the future? That will depend on the two countries' bilateral relations in economy, politics, foreign affairs and security. What is certain is that Japan's purchase of Chinese bonds marks a milestone of mutual trust between the two governments.
Zhang Jifeng is a director of the Department of Economics of Institute of Japanese Studies, Chinese Academy of Social Sciences.
(The original article in Chinese was translated by Lu Na and Lin Liyao.)
Opinion articles reflect the views of their authors, not necessarily those of

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