China turns top seller of Japan debt, awaits yen retreat


China went from scooping up the most Japanese debt in a year to selling the most, exiting the world’s lowest yields as forecasters expect the yen to retreat further from the 15-year high seen in November.

The country sold a net ¥81.3 billion of Japanese bonds in November, the Finance Ministry said Wednesday. China had been set for the biggest yearly increase in data going back to 2005 before unwinding with net sales in three of the four months through November.

“With China’s currency likely to appreciate against the yen, there is little incentive for China to buy Japanese debt,” said Masaru Hamasaki, chief strategist at Toyota Asset Management Co. in Tokyo, which manages about $17 billion. “Because of low yields and currency risk, I think China won’t buy Japanese debt that much this year.”

China, holder of the world’s largest foreign-exchange reserves, is shifting attention from Japan to Europe as a credit crisis pushes the trading bloc to seek outside help, according to Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA. Chinese Vice Premier Li Keqiang last week expressed confidence in Spain’s financial markets and pledged more purchases of that country’s debt.

Japan’s currency will tumble almost 10 percent against the dollar this year, according to the median estimate of economists surveyed by Bloomberg, which would give the currency its worst annual performance since 2005. The yen surged against all of its 16 major counterparts in 2010, prompting the government of Prime Minister Naoto Kan to intervene to weaken the currency in September for the first time since 2004.

The yen continued to climb, reaching 80.22 per dollar on Nov. 1, the highest since April 1995, when it set a postwar record of 79.75. China’s yuan advanced 3.6 percent in 2010 after the government relaxed exchange controls in June, and analysts see it ending this year 4.8 percent stronger, at 6.30 to the dollar.

China bought a net ¥2.32 trillion in Japanese debt over the first seven months of 2010 and had been set for the biggest yearly increase on record until it reduced holdings of the debt by a net ¥2.02 trillion in August. Finance Minister Yoshihiko Noda at a hearing in September suggested it was inappropriate for China to buy Japan’s bonds without a reciprocal ability for his nation to invest in China’s market.

“The yen’s historic strength provided an opportunity to sell in November,” said Yuji Kameoka, chief currency strategist at Daiwa Institute of Research Ltd. in Tokyo. “China seems to take account of foreign exchange, buying a weak currency and selling a strong one.”

Altogether, China sold a net ¥290.4 billion in Japanese debt in 2010 through November, according to Finance Ministry data. The State Administration of Foreign Exchange, which oversees China’s foreign-exchange reserves, didn’t respond to faxed questions seeking comment.

The euro rebounded on Jan. 11 from a four-month low after Japan said it plans to buy bonds issued by the European Union’s financial-aid funds, echoing China’s pledge to help stem the region’s debt crisis. Widening budget gaps and a surge in yields forced Greece and Ireland to accept bailouts last year.

Europe and the euro will remain among the most important areas of investment for China’s $2.85 trillion in foreign-exchange reserves, Deputy Central Bank Gov. Yi Gang said in a statement last week. Vice Commerce Minister Gao Hucheng said on Jan. 5 that China will buy Spanish public debt in the primary and secondary markets.

“China is increasing holdings of bonds issued by countries facing financial difficulties so as to wage influence,” Credit Agricole’s Kato said. “Japanese debt isn’t such a strategic investment target for China.”

Japanese 10-year yields, the lowest among 32 bond markets tracked by Bloomberg data, will end 2011 at 1.24 percent from 1.175 percent Wednesday, according to a weighted forecast of economists surveyed by Bloomberg News. The rate fell to 0.82 percent on Oct. 6, the lowest since July 2003.

German 10-year government bonds offer a yield that’s 1.76 percentage points higher than Japanese debt of a similar maturity, up from 1.10 points four months ago. Ten-year yields are 2.18 percentage points higher in the U.S. than in Japan.

Japan’s government bonds handed investors a 2.4 percent return last year, compared with a 6.2 percent gain for German bunds and 5.9 percent advance for U.S. Treasuries, Bank of America Merrill Lynch indexes show.