Japan Barks at U.S., but Will It Really Bite?
Japanese Prime Minister Ryutaro Hashimoto on Monday fired a warning shot at U.S. financial policymakers, suggesting that his government might sell portions of its huge U.S. Treasury bond holdings if American officials fail to stem troublesome gyrations in the relative values of the dollar and yen.
Such a sell-off could have dire consequences for the U.S. economy because the Japanese are the largest foreign holders of Treasury securities. Any wholesale divestiture by the Japanese could lead to a rise in U.S. interest rates, affecting everything from mortgages to credit cards and, in turn, slowing economic growth.
But few analysts took the threat very seriously, in part because such a sell-off could also have dire consequences for the Japanese economy. And Japanese government officials moved swiftly as the business day opened this morning in Tokyo to downplay the seriousness of any threat.
Government bureaucrats said Hashimoto’s remarks were “misinterpreted” and that the Bank of Japan, the nation’s central bank, has no current plans for any unusual sales of U.S. Treasuries.
Driving up U.S. rates would make Treasury bonds even more attractive to international investors than yen-denominated securities, experts noted.
To the extent the move slowed U.S. economic growth, “that would curb consumer demand here for just the sort of things the Japanese are adept at exporting to us, like autos,” said Marshall Front, chairman of Chicago-based Trees Front Associates, a money management firm.
Hashimoto’s comment “may be a threat, but it’s a very empty one,” said Ron Bevacqua, a Tokyo-based analyst at Merrill Lynch Japan Inc.
The Bank of Japan holds more than $200 billion in U.S. Treasuries, Bevacqua said. If it tried to sell these in large quantities, that would “throw global financial markets into turmoil” and cause the yen to strengthen sharply, he said.
In fact, Hashimoto took pains, in the same New York appearance in which he made his remarks about Japan’s holding of Treasuries, to praise the level of U.S.-Japanese cooperation in economic affairs. “I am convinced that even in the 21st century the Japan-U.S. partnership should be able to bring about the fruits of stability and prosperity to our two peoples,” he said.
Japanese investors have been net buyers of U.S. Treasury bonds for many years. Although the pace of buying slowed in the first quarter of 1997, Japanese-based investors bought $12.9 billion in Treasury bonds and notes in the quarter ended March 31, according to Abby Joseph Cohen, co-chair of the investment policy committee at Goldman Sachs.
Foreign ownership of U.S. Treasury securities has risen in the last four years, to roughly a third of all outstanding issues. Foreign holdings of marketable Treasury debt increased to $1.13 trillion at the end of 1996, from $623 billion in 1993.
This has sparked periodic concerns in U.S. markets that the domestic economy is too dependent on, and too complacent about, foreign capital.
But the heavy foreign inflows seem destined to continue as long as the dollar continues to be treated as the world’s reserve currency, which mandates that foreigners hold significant amounts of reserves in dollar-based assets.
“The whole thing to me sounds kind of implausible,” James Grant, editor and publisher of Grant’s Interest Rate Observer, a widely read New York-based newsletter on the credit markets, said of Hashimoto’s comments.
In his remarks, Hashimoto complained that the dollar-yen relationship has grown so volatile that it has hampered fiscal planning efforts by the Japanese. He said the United States should make better efforts to stabilize the exchange rate “so we will not succumb to this temptation to sell off [U.S.] government bonds and switch our foreign reserves to gold.”
The outspoken prime minister, answering a question from the audience at an address at Columbia University, noted that foreign ownership of Treasury securities has been instrumental in keeping U.S. interest rates low and keeping the U.S. economy “maintained.”
He said the Japanese government has been tempted to sell off its Treasury holdings on several occasions--especially during periods of U.S.-Japan trade tension--and added: “If the Treasury bonds in the hands of the Japanese government were sold en masse, I believe the U.S. economy has the ability to absorb it, but the effects could be pretty significant.”
Some observers speculated that Hashimoto was irked at the summit of eight industrialized countries that ended Sunday in Denver. Japan was criticized for failing to control its trade surplus, particularly with the United States, a development Hashimoto might have found provocative.
“I suspect this is one way of bringing into perspective the need for us to cooperate with the Japanese” on currency rates, Front said. “But I don’t think this will change anyone’s policy.”
Moreover, a large-scale sale by the Japanese government of its U.S. holdings might have a more dire fiscal impact on the Japanese than on the U.S. economy.
Still, Hashimoto may have been hinting that “there are political considerations that would override purely financial considerations,” Grant said.
Times staff writer David Holley in Tokyo contributed to this report.
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Foreigners’ Rising Claim
Foreign investors, including central banks, owned approximately one-third of outstanding marketable U.S. Treasury securities at the end of 1996, up sharply from 21% in 1993. Amounts in billions:
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Foreign holdings: $1,131
Total marketable Treasury debt: $3,460
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U.S. Debt in Foreign Government Hands
The bulk of Treasury liabilities owned by foreigners is in the hands of foreign central banks and other government institutions. By region, in billions of dollars:
Latin America: $78
Note: Figures are as of February.
Source: Federal Reserve Board