By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The U.S. Treasury market could feel financial aftershocks from Japan’s tragic earthquake. Offloading some of the Asian giant’s $1 trillion of foreign reserves could raise cash to help rebuild after Friday’s disaster. Meanwhile, the Federal Reserve is due to end its Treasury bond-buying program in June. If Japan, the second-biggest foreign holder, starts selling that’s another support gone — with the potential to make borrowing more expensive for the U.S. government.
It’s too early to estimate the cost the Japanese government and private sectors will have to shoulder for reconstruction efforts. But bond investors can’t any longer take for granted that Japan will leave its ample reserves intact as it has, broadly speaking, for the past several years. For the government, cashing in could be more palatable than yet more borrowing. Japan’s debt already amounted to more than 200 percent of GDP, according to the International Monetary Fund, before last week’s events.
Between the public and private sectors, Japanese investors owned $882 billion of Treasuries at the end of last year, according to U.S. data — second only to the Chinese with $1.2 trillion. Traders on Monday were already speculating that Japan’s institutional investors could sell liquid Treasury holdings to raise cash. It’s not a stretch to imagine the Japanese government might do the same. Selling dollar-denominated assets could strengthen the yen — an undesirable outcome for the nation’s manufacturers. But at a time of crisis it shouldn’t be ruled out.
If it happened, it would up-end many investors’ faith in the notion that Asian central banks would never sell their Treasuries. In more concrete terms, it could further change the balance of supply and demand in the market for U.S. government debt. And there was already a question about who will step up to buy Treasuries when the Fed ends its buying program in just three months.
The U.S. central bank has accumulated more than $400 billion of government paper since it kicked off its purchasing program in November. It has been buying enough to absorb some three-fifths of new debt being issued by Washington to fund the yawning federal deficit. Prominent investors including Bill Gross of Pimco have warned that interest rates could spike when the Treasury market loses its newest best friend. Now it can’t be sure of one of its oldest supporters, either.