Japan overtakes China as #1 U.S. creditor

Posted at 9:51 AM, May 07, 2015
and last updated 2015-05-07 09:51:38-04

In February, a milestone occurred with regard to foreign holders of U.S. debt: Japan surpassed China as the world’s largest creditor to the United States. This marks the first time since the financial crisis that China has not been the largest foreign holder of U.S. Treasuries.

Japan now holds $1.224 trillion in U.S. Treasuries, slightly more than the $1.223 trillion held by China. The Federal Reserve is the world’s largest holder of Treasuries. Its holdings exceed $2 trillion, up from just $755 billion in 2007 due to the Fed’s quantitative easing (QE) bond-buying program that was initiated to boost the economy after the financial crisis

Jockeying Back and Forth

Japan has increased its net holdings of U.S. Treasuries by $13.6 billion over the past year. Meanwhile, China has decreased its net Treasury holdings by $49.2 billion over this same period, as its once red-hot economy has begun to cool. Therefore, it is not surprising that Japan has overtaken China as the largest U.S. creditor.

Experts attribute this shift to several factors. The most immediate is a recent change in the asset allocation policy of the Government Pension Investment Fund of Japan (GPIF), the largest state pension fund in the world. The GPIF raised its allocation for foreign bonds from eleven percent to fifteen percent last fall in order to reap higher yields than those available on Japanese debt. For example, the yield on a ten-year Japanese government bond was just 0.30% on April 17, while the yield on the comparable U.S. Treasury note was 1.87% on April 17.

Government bond yields are also falling throughout the euro zone as central banks’ bond purchases have pushed bond yields close to zero. For example, the yield on the ten-year German government bond was just 0.08% on April 17. Japan (along with most other nations) believes the U.S. will be the only developed country in the world to raise interest rates in the near future.

As China has slowed its purchases of U.S. Treasuries, some pundits have feared that their prices could decline. With Japan now stepping up to the bond-buying plate, those fears have been somewhat abated.

What Does It Mean?

What does all this mean to the U.S. economy and consumers? For one thing, Japan’s increased U.S. Treasury holdings have helped push long-term yields on U.S. bonds down to near-record lows. This has helped keep consumer interest rates low, making it less expensive for U.S. consumers to buy homes, cars or anything else on credit.

No other nation comes close to Japan and China when it comes to their holdings of U.S. Treasuries. The Caribbean Banking Centers, which include the Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama, are number three on the list at $350.6 billion. They are followed by Belgium ($345.3 billion), a collection of oil exporting nations ($296.8 billion), and Brazil ($259.9 billion).

Therefore, this jockeying back and forth between Japan and China as the largest foreign holders of U.S. Treasuries is an economic development that is worth keeping an eye on.