Japan, China Locked In by Investments

Japan's Nikkei share average rose Friday, rebounding from a three-year closing low Thursday.
Japan's Nikkei share average rose Friday, rebounding from a three-year closing low Thursday. (By Issei Kato -- Reuters)
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By Blaine Harden and Ariana Eunjung Cha
Washington Post Foreign Service
Saturday, September 20, 2008

TOKYO, Sept. 19 -- Japan is a captive of its investment in the United States economy and its central bank has no real alternative other than to hold on to the massive amounts of U.S. Treasury bonds it owns and work hard to help clean up the mess on Wall Street, Hidehiko Sogano, an associate finance director at the Bank of Japan, said Friday.

"The reason why we stress the importance of stability is that the amount which we have in U.S. assets is so enormous," said Sogano, referring to the roughly $860 billion of the bank's $1 trillion in reserves that are in U.S. investments, mostly Treasury bonds.

Sogano spoke on a day in which East Asian stock markets sharply rebounded after days of declines. Japan's Nikkei average was up 3.8 percent, cutting in half losses for the week. The Shanghai Composite Index surged 9.5 percent, while Hong Kong's Hang Seng index was up 9.6 percent. The rises followed market-calming moves by the U.S. government that helped drive the Dow Jones industrial average up 410 points Thursday and another 368 points Friday.

Japanese banks, finance companies, shipping firms and steelmakers recorded double-digit gains. The nation's biggest nonbank financial company, Orix, jumped 16 percent, its largest increase in 24 years. The fourth-largest bank in Japan, Resona, was up 18 percent.

Just how deeply Japan is enmeshed in troubled loans in the United States became significantly more clear Friday, when Finance Minister Bunmei Ibuki conceded at a parliamentary hearing that the government and central bank hold about $74.5 billion in debt issued by mortgage finance giants Fannie Mae and Freddie Mac, recently bailed out by the U.S. government.

Sogano, who said he was speaking for the bank, is part of a team at the bank that has worked around the clock this week to calm global markets. "If we shift out of the dollar without deep consideration, then that would surely affect the market," he said. "So that is why we always have to be very careful. If that sounds conservative, it is conservative."

In a week of epochal market turmoil, for the Bank of Japan being very careful has meant being aggressively interventionist. Besides injecting the equivalent of about $96 billion in four days into money markets for overnight loans, the bank has gone into the business of making dollar loans.

It joined with four other central banks in a $180 billion currency swap with the Federal Reserve and will use its $60 billion share to supply dollars to local and foreign institutions.

Sogano said that the Bank of Japan feels that U.S. market turmoil, even if it continues for months or years, will not alter the central place the United States occupies in global finance and will not undermine the willingness of the Bank of Japan to invest in the United States. "There will be no change because we quite understand the importance of the U.S. market and the stability of the dollar," he said.

Sogano said that the bank does not support a reduction of interest rates, which are already at 0.5 percent in Japan.

The Bank of Japan will focus primarily on increasing liquidity in money markets, so that short-term rates will fall back to levels of before the turmoil of the past week and banks will again be willing to lend money to each other at the lower rates.

Ibuki, the Finance Minister, said Friday that Japan would consider funding the International Monetary Fund or other international lending agencies to help with bad debt.

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