How much longer can the US count on Japan to buy Treasuries?
Nakagawa Masaharu, since 2007 shadow finance minster in the DPJ's Next Cabinet, has raised the specter of DPJ government's forgoing US government bonds (at least those dominated in dollars instead of yen). In a story that originated with the BBC, according to Jiji Nakagawa said, "We propose that we would buy [the US bonds], but it's yen, not dollar."(The fact that the article gets the name of the party that has governed for Japan for a half century wrong — and that Jiji is the only Japanese media outlet carrying this story — makes me a bit reluctant to link to it, but the markets apparently took the report seriously.)
The BBC writes off the possibility that the DPJ could take power this year, but obviously I think it is a mistake to dismiss the DPJ out of hand: Ozawa's troubles notwithstanding, the outcome of the general election is still open. Which is why Nakagawa's remarks should be taken seriously. As Brad Setser reminded readers recently, creditors prefer to lend in their own currency. He was referring to China, but his analysis applies equally to Japan. The DPJ — less constrained than the LDP thanks to its status as an opposition party (and an opposition party interested in distancing Japan from the US) — is free to say what LDP members and bureaucrats may think but are constrained from saying openly.
That said, Yosano Kaoru, finance minister-economy minister-FSA chief did allude to the internationalization of the yen at the recent ASEAN + 3 finance ministerial meeting in Bali, when he pledged up to 6 trillion yen in emergency loans to Southeast Asian countries that would be financed out of Japan's foreign reserves. In other words, Japan would sell some of its dollar holdings to convert into yen, which it would then lend in the region. Whether Japan could sell that quantity is doubtful, but Nakagawa and Yosano's remarks suggest that the Japanese establishment is concerned about Japan's dollar reserves — and is surely watching China's activities warily.
As the two largest holders of US government bonds, Japan and China are locked in a standoff. Neither wants to be the second to liquidate their holdings. Both governments are trapped by their holdings, in that the economic consequences of unloading their Treasuries could damage the US recovery and harm their own economies, but they also don't want to pay for US profligacy by holding Treasuries while the US inflates its way out of debt (or defaults entirely). Given the future outlook for the US government's balance sheet, they have good reason to worry.
So to return to Nakagawa's threat, it is worth asking whether it is a credible threat. Could a DPJ-led government act less restrained in its financial relationship than the Chinese government? I think there is reason to doubt Nakagawa, not least because the DPJ is running to a certain extent on the basis of a populist nationalism with the US as a major target. If the DPJ takes power, it may find it hard to deliver on all of its campaign promises. Moreover, it is unclear whether Nakagawa was voicing his own opinion or speaking for the DPJ as a whole. If the former, it may be irrelevant what he thinks a DPJ government should do about Treasury holdings.
Nevertheless, the DPJ may be playing a dangerous game, not just with the United States but with China, which has every reason to be concerned that Tokyo might try to beat it in a race for the exits.
This should serve as a reminder that the LDP's conservatives do not have a monopoly on nationalism — and a reminder that Japanese nationalism takes many forms. Is Nakagawa Masaharu's argument about the "internationalization" of the yen any less nationalistic than Nakagawa Shoichi's persistent calls for a Japanese nuclear arsenal?
UPDATE: Kamei Shizuka, head of Kokumin Shintō, a prospective DPJ coalition partner, reassured Jeffrey Bader, senior director for Asia on the National Security Council, that a DPJ-led government would continue to purchase US bonds. Kamei probably does not have the authority to speak for a government that does not exist yet and may never exist, but it does diminish the authoritativeness of Nakagawa's remarks.
Other posts by Tobias Harris: