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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (13479)	10/15/2004 8:50:50 AM
From: russwinter	Respond to of 116555

Yep, there's your main explaination for the bond "rally". But here's a story that suggests they've shot their wad. Japan seen slowing purchases of U.S. Treasuries Thu Oct 14, 2004 10:28 PM ET TOKYO, Oct 15 (Reuters) - Japan curbed its buying of U.S. Treasuries in September and will likely slow it further as its cash deposits shrink after it gobbled up about $300 billion in U.S. notes in the 20 months to August. "I think its buying of Treasuries will slow down sharply," said Izuru Kato, chief economist at Totan Research. "It may buy more when there are lots of auctions like in November. But I think additional purchases of Treasuries will be limited from now." The $300 billion figure is nearly half the annual U.S. current account deficit and about 70 percent of the U.S. budget deficit and many analysts say Japan's hefty Treasuries buying had helped keep U.S. interest rates low. According to data released last week, securities -- most of which are believed to be U.S. Treasuries -- held in Japan's forex reserves increased by just $1.9 billion in September, compared to an average $15 billion monthly gain in the last 20 months. Japan had been steadily increasing its holdings of T-notes to channel dollars it had bought in the currency markets. From early 2003 to March 2004, Tokyo sold about 35 trillion yen, mostly to buy dollars, fearing a rapid rise in the yen could damage Japanese exports, the main engine of the economy. Most of the dollars were converted to higher-yielding Treasuries after a time-lag so that markets would not know the timing of the government's currency market intervention and also to avoid volatility in the Treasury market. As a result Tokyo kept buying T-notes even after it stopped its campaign in the currency markets in March this year, changing its dollars into T-notes a little at a time. This pushed up its securities holdings to $688 billion as of September compared to $387.7 at the end of 2002. The other side of the coin was a fall in its foreign currency deposits to $122.6 billion by September -- about 14.7 percent of the total reserves -- from a peak of $180 billion earlier this year. The percentage of foreign cash deposits is back around 2002 levels when Japan kept about 15 percent of its forex reserves in deposits before it embarked on its large-scale intervention. Some analysts think the shift from deposits to T-notes will soon come to an end as a result. Others think it could go on for a little while longer but not on the scale seen in the past year and a half. "They need to hold some amount of cash for emergencies. But unlike private funds, the forex reserves account does not need to set aside a certain percentage in cash," said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank. Considering the amount of cash Japan held before starting its intervention campaign -- about $70 billion -- Japan still has room to increase its holdings of Treasuries by up to about $50 billion, Sasaki said.