The Eurozone Crisis Forced Japan, Switzerland To Buy Treasuries

The latest report on foreign treasury holdings is showing China and Japan holding similar amounts of US government paper, with oil exporters and the Caribbean Banking Centers (Cayman Islands, the Bahamas, etc.) in third and fourth place.

Overall foreigners continued to buy large amounts of Treasuries in 2012. Japan was the largest purchaser, with total holdings now close to that of China. Trying to keep the yen from appreciating further (strong yen had put tremendous pressure on Japanese exporters) was one of the reasons for the increase. Defending the yen from appreciating involves increasing USD foreign reserves - which end up invested in Treasuries. And the reason the yen has been so strong has to do with the eurozone crisis, with global investors using Japan's currency as a safe haven (particularly to get away from anything correlated to the euro).

WSJ: Tokyo's Treasury purchases have come amid an effort to defend the yen against appreciation that could hurt exports, while China has been giving its currency more leeway to appreciate against the dollar. Japan has indicated it may intervene again in the currency market after the U.S. Federal Reserve's recent decision to embark on another round of stimulus.

The second largest increase in holdings came from Switzerland. The Swiss central bank (SNB) had built a tremendous exposure to the euro, which it had to buy to defend the franc from appreciating (see discussion). This exposure put Switzerland at risk to further euro depreciation, which could become extreme in the case of the eurozone breakup. Not wanting to take this much risk, the Swiss chose to diversify their foreign reserves into dollars - which led to Treasury purchases.

Ironically the eurozone induced global fears have helped fund the US budget deficit, as both Japan and Switzerland were forced to defend their currencies and buy Treasuries. Next time the US Treasury may not be so lucky.