Japan on Track to Overtake China as Top Foreign Owner of U.S. Debt

May 4, 2012 - 3:26 PM

Fukushima

The Fukushima Daiichi nuclear power plan on March 15, 2011. (AP Photo)

(CNSNews.com) - After a 9.0 earthquake struck off the coast of Japan last March and sent a tsunami crashing into the Fukushima Daiichi nuclear power plant, causing a Japanese national emergency, some worried the Japanese would stop buying U.S. government debt—or even sell off some of what they already owned—thus precipitating a spike in the interest rates on that debt.

In fact, according to data published by the U.S. Treasury Department, Japan has done just opposite, buying more U.S. government debt--even as China has started to decrease its holdings of U.S. debt.

Data from the most recent 8 months published by the Treasury indicate that between the last day of June 2011 and the last day of February 2012, entities in Japan increased their holdings of U.S. Treasury securities from $881.6 billion to $1.0959 trillion. At the same time, entities in the People’s Republic of China decreased their holdings of U.S. Treasury securities from $1.307 trillion to $1.1789 trillion.

In other words, in just eight months, the Japanese increased their net holdings of U.S. government debt by $214.3 billion while the Chinese decreased theirs by $128.1 billion. On average, from the end of June through February (the last month for which data has been reported), the Japanese have closed the gap between their holdings of U.S. debt and China's holdings of U.S. debt by about $53.13 billion per month.

At the end of June 2011, the Chinese owned $425.4 billion more in U.S. government debt than the Japanese. By the end of this February, the Chinese owned only $83 billion more than the Japanese. If the June-through-February trend continued through March and April--for which data has not yet been reported--the Japanese may have already overtaken the Chinese in ownership of U.S. debt.

On March 15, 2011, four days after the earthquake and tsunami hit Japan, the Associated Press reported: “Some worry that Japan will sell some of its vast holdings of U.S. government debt to raise money. Doing so would push the prices of U.S. Treasury bonds down and yields up, raising U.S. interest rates.”

A report in the New York Times that same day made a similar observation.

“Analysts also rushed to calculate the ‘repatriation risk’ as Japanese investors with money abroad rushed to bring it home--for reconstruction or to have readier access to their savings,” the Times reported. “With interest rates at home near zero, Japanese investors have looked elsewhere for higher yields. Japan is the second largest holder of United States Treasury bonds, after China, and any withdrawal on a large scale could put some upward pressure on interest rates in the United States.”

As it turned out, the Japanese did not start drawing their money out of the United States. But the Chinese did.

While diminishing their overall holdings of U.S. Treasury securities since last June, the Chinese, over the past three years, have almost entirely divested from U.S. Treasury bills, which are notes that mature in one year or less. Chinese ownership of T-bills peaked in May 2009 at $210.4 billion. By the end of February, according to the U.S. Treasury, Chinese ownership of T-bills had dropped to $3.76 billion—a decline of 98 percent.

By contrast, the Japanese have increased their ownership of U.S. T-bills over the past three years. In May 2009, the Japanese owned about $60.4 billion in T-bills, according to the U.S. Treasury. By the end of February 2012, they owned about $63.1, an increase of $2.7 billion, or about 4.5 percent.

The only entity in the world that has greater overall holdings of U.S. government debt than entities in China or Japan is the Federal Reserve. According to its most recent monthly report, the Fed owned $1.665 trillion in U.S. Treasury securities as of the end of March.

As of the close of business yesterday, the total U.S. government debt was $15.67 trillion, of which 10.91 trillion is debt held by the public (as opposed to "intragovernmental" debt that the U.S. government owes to its own trust funds, such as the Social Security trust fund).

With their combined ownership of $3.938 trillion of the U.S. government's $10.91 trillion debt held by the public, the Federal Reserve, the Chinese and the Japanese own about 36 percent of the U.S. government's debt held by the public.

Here, in billions of dollars, are the amounts of U.S. debt that entities and China and Japan owned at the end of each month from June 2011 through February 2012, as reported by the U.S. Treasury.

__________________________China______Japan

June 2011                                          $1307.0           $881.6

July 2011                                             1314.9            885.3

August 2011                                       1278.5             907.1

September 2011                                1270.2             984.6

October 2011                                     1256.0             1006.8

November 2011                                 1254.5             1066.7

December 2011                                 1151.9             1058.0

January 2012                                     1166.2             1082.8

February 2012                                    1178.9             1095.9