Japan’s current fiscal crisis has inflated its debt to the US Government to $1.2244trn in February, leading it to overtake the $1.2237trn owed by China.
The figures released by the Treasury Department indicated that although both countries experienced an easing of holdings in January, China’s decline was slightly bigger, thereby switching the two rankings.
China has held onto the top spot since the economic crisis in 2008
“The dynamic between Japan and China has shifted, in part due to foreign-exchange-reserve needs and the currency dynamics between the two countries,” Edward Acton, a US government-bond strategist for RBS Securities, told Bloomberg.
China has held onto the top spot since the economic crisis in 2008. As the US increased lending to foreign governments in order to prop up the international economic landscape, its own debt grew considerably. Deficit exceeded $1trn for the first term of the Obama Administration, but has shrunk each subsequent year, falling to $483bn in 2014.
Given China’s slowing economic growth and level of exports, as capital outflows also taper, fewer dollar holdings are being purchased by Beijing. Not only is this a result of less funds with which to do so, it also prevents the yuan from strengthening too much, which would place even greater pressure on China’s export market.
On the other hand, as Tokyo battles with falling inflation and a sluggish economy, capital outflows are rising. Investment overseas has been further bolstered by attractive dollar assets, which have a relatively high rate of return.
In an interesting turn of events, the positioning of Asia’s two biggest economies are rotating, with China gaining the standing that Japan had upheld for years. Historically, Japan and China have never risen at the same time: the pattern shows that as one grows, the other weakens. This latest indication seems to prove this particular lesson correct once again, as Japan bows to China in terms of economic and political clout.