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China sharply expanded investments in Japanese government bonds in the first months of this year, apparently to increase exposure to stable Japanese vehicles against the backdrop of the European debt crisis, data from the Finance Ministry and other sources showed Saturday.

While welcoming the interest from deep-pocketed China, which sits on rapidly growing foreign currency reserves, Japanese officials remain guarded about the country’s intentions, fearing that the sharp expansion in investments may turn out to be a temporary shift to “safe” instruments.

According to the Finance Ministry, China purchased ¥1.28 trillion more Japanese securities than it sold in the January-May period this year.

The amount — for just less than half a year — already eclipses the record ¥253.8 billion in annual net purchases for the whole of 2005. In May alone, the month for which the latest data are available, its net purchases surpassed ¥735.2 billion, a record high monthly figure.

Most of the money is believed to have been invested in JGBs, with the majority going into short-term instruments maturing in one year or less.

The Chinese Foreign Ministry explained that such investments are a strategy to diversify investment of foreign currency reserves, according to Qin Gang, deputy director general of the ministry’s Information Department.

The State Administration of Foreign Exchange, meanwhile, said the most important principle in investments is “safety.”

A market participant said investments in JGBs accelerated because they are perceived as one of the safest asset vehicles in the world.

It remains unknown, however, how long the Chinese interest in Japanese debt instruments will continue, given China’s downbeat perception about Japan’s debt repayment capability.

In its first assessment of the sovereign debt of 50 countries issued in July, Dagong Global Credit Rating Co. gave an AA- rating with a “negative” outlook for JGBs.

Observers are also paying attention to see if China can be as stable a supplier of funds as Western economies. China imposes restrictions on investments by its private-sector entities in foreign securities, meaning that the majority of investment flows from China are at the mercy of Beijing’s whim.

China has seen its foreign currency reserves grow sharply as a result of currency market intervention by the People’s Bank of China, the central bank, to stem the Chinese yuan’s gains against the dollar.

As of the end of June, China was sitting on $2.45 trillion worth of reserves, the world’s largest, with an estimated 70 percent or so invested in dollar assets such as U.S. Treasury bonds.

China, however, is thought to have been adjusting its dollar-oriented investment portfolios following the financial crisis in the United States two years ago.

Japan had roughly ¥684 trillion in outstanding government bonds as of March 31, data by the Bank of Japan shows. Of this amount, only 4.6 percent was owned by overseas investors.

The government is planning to step up its efforts to market its bonds overseas, because too much reliance on domestic investors could turn out to be destabilizing.

Whether China will keep investing in Japan, however, remains to be seen.

“If China sees Japan’s fiscal policy is not sustainable, it would not invest in Japan even if it has excess foreign currency reserves,” said Hisashi Yamada, a senior researcher at the Japan Research Institute.

A source at the Finance Ministry also remained alert.

“We need to judge the intention of China’s selling and buying,” the ministry source said.

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