Worried About The Strong US Dollar? Blame Japan

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By Jacob Maslow

Shibuya Crossing
pedestrians at Shibuya crossing. The famous scramble crosswalk is one of the busiest in the world being used by over 2.5 million people daily.

It looks like the number one holder of US government debt is changing its ways. For the longest time, the primary buyers of and holders of US government bonds were Chinese. Thanks to two decades of continued Chinese GDP growth, China has racked up trillions of dollars in revenue and profits and has plowed a lot of that into buying US government bonds paired with artificially decreasing value of the Chinese Yuan to make Chinese exports more attractive.

China was able to expand its economy quite aggressively. Well, it looks like its game plan has changed quite a bit recently. Thanks to a slowing GDP rate and uncertainty caused by its shaky real estate bubble, China doesn’t look like it has any other option but to change how it handles its external capital assets. One key expression of this change in policy is its recent trend of unloading some of its sizable US government bonds. China is trimming back on its bond holdings, while it’s still the top US holder of US government debt. It appears that Japan is going to overtake China. This should not be a surprise as the Bank of Japan continues to reduce the value of Yen to make Japanese exports more attractive. This has pushed Japanese investors to snap up US government bonds and also snap up dollars.

All told, foreign investors are drawn to the US dollar because of higher yields in the US and continued appreciation. I don’t expect this to change anytime soon, as the European Central Bank and the Bank of Japan continue their stimulus programs.

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