Saturday, 26 March 2011

On Japanese treasury holdings.

two weeks after the earthquake, uncertainty still reigns over whether Japan will reduce its purchases of Treasury debt and other foreign assets — a decision that could force the U.S. to pay higher rates on its securities to attract buyers and possibly drive up U.S. interest rates.
Another significant hint at exactly in how precarious a state US finances truly are. If the Japanese can't realistically sell their treasury holdings during an emergency, then what good as an investment are they really?

So far, Japan's financial response to the disaster has been monetary easing:

The BoJ doubled the cash it sets aside for buying assets such as government bonds on Monday to 10 trillion yen ($124.1 billion) in an emergency move to shore up confidence in crisis-stricken Japan.
Total rebuilding efforts are rumoured to be in the $180-300bn range. If we were to take $250bn as the final bill, financed through the sale of treasuries, this would amount to (250/885=) 28% of Japanese holdings of US Treasuries.

In the event they were to sell, who would turn up as a buyer of size? China would be the obvious candidate. They currently sit on $1,154 billion of US Treasuries. But except for China, the only other obvious bidder would be the Federal Reserve, by yet again expanding their Quantitative Easing program.

And that's really the crux of the issue. Either the US needs to increase the pace of their QE program, or the Japanese do. Either way, we'll have more paper currency chasing a fixed amount of goods, which will ultimately translate into higher prices for the consumer.

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