Japanese Begin to Balk at Financing the U.S. Deficit

Japanese investors, by and large the financiers of the U.S. budget deficit, are starting to question how much money they should pour into U.S. Treasury securities.

Their concerns, which became evident in the Treasury’s latest auction, are primarily the dollar’s weakness and the likelihood that U.S. authorities may have to push up interest rates to support the currency. As interest rates rise, bond prices tend to fall, making them less attractive to investors.

At first glance, the Treasury’s three- and 10-year note auction last week appeared quite successful, but economists say a closer look shows a different story.

“Most of the Japanese purchases were financed by borrowing dollars,” meaning little money flowed from Japan to the United States, said Yuji Nogami, a senior bond dealer at Daiwa Securities America Inc.

“Instability in the exchange market has raised a question about private money,” said David Resler, a senior economist at Nomura Securities International Inc.

Up to now, private foreign funds have been a major source of deficit-financing through the purchase of Treasury securities.

Creates Vicious Circle

But the dollar’s weakness and uncertainty about its long-term outlook has made Japanese investors less eager to hold Treasury securities. Despite repeated intervention by the Federal Reserve and the Bank of Japan, the dollar last week fell to 122.30 Japanese yen, a 10-month low, in Tokyo.

The slackening demand for bonds, in turn, spells further trouble for the dollar, in an increasingly vicious circle that became evident last year.

Because of the dollar’s decline, private foreign investors sold a net $7.6 billion of Treasury paper in 1987, which further accelerated the currency’s slide.

Foreign central banks had to step in and buy massive amounts of dollars to lift the dollar from historic lows touched in January. The Japanese and European central banks then invested those dollars in Treasury paper, used to help finance the budget.