Japan and China are in talks over purchasing substantial amounts of each other's government bonds to ensure financial stability in Asia, Finance Minister Jun Azumi said Tuesday.
The two countries are expected to reach an agreement when Prime Minister Yoshihiko Noda meets with Chinese leaders Sunday and Monday in Beijing.
A senior official said separately that the Noda administration will use foreign-exchange funds to buy as much as $10 billion worth of Chinese government bonds. China has recently expanded its portfolio of Japanese government bonds.
Holding a significant amount of Chinese government bonds would likely provide Japan with access to crucial information about China's economy and financial market, help boost global trade of the yuan in foreign exchange markets, and push for greater transparency in Beijing's foreign exchange policy, the official said.
"Both countries would benefit hugely," Azumi told reporters. "It is diplomatically important to strengthen relations (with China) by holding the (Chinese) yuan."
But he denied such a move would represent a policy shift by Japan on the use of its foreign exchange reserves, and rejected suggestions it would undermine confidence in the dollar as the world's principal currency.
Tokyo and Beijing are also expected to reach a comprehensive accord on financial collaboration during Noda's visit to China, including jointly investing in a fund for environmental protection.
Japan recently has stepped up its commitment to economic stability in Asia. During a trip by Noda to South Korea in October, Tokyo and Seoul agreed to expand their currency-swap arrangement to mutually provide dollar funds at times when global financial markets are facing liquidity shortages.