Japan Regains Title as "America's Top Banker"; America Shrugs

The Wall Street Journal and other news outlets reported yesterday that China, after selling off significant US Treasury holdings at the end of last year, is no longer the biggest holder of US debt:

China sold a record amount of its U.S. Treasury holdings in December, ceding its place as the world's biggest foreign holder of U.S. debt to Japan.

The move triggered concerns about China's continuing appetite to loan money to the U.S. amid a mounting budget deficit here and tensions between Washington and Beijing.

China pared its Treasury holdings by $34 billion to $755.4 billion in December, placing it second behind Japan, with $768.8 billion, according to U.S. Treasury estimates. For the first time since August 2008, Tokyo took over the top spot after steadily increasing its purchases of Treasury debt over the past several years....

Chinese officials have begun expressing "worries" over its significant holdings of U.S. government bonds and concern about the U.S. budget deficit, which is expected to hit $1.6 trillion....

However, China's sales of Treasurys don't necessarily translate into a loss of confidence in the U.S., many analysts said, noting that Beijing's moves in December could simply indicate steps toward diversification. Market observers said the Chinese may simply have moved their money into other dollar-denominated assets, such as corporate debt or private equity.

The increase for Japan appears to have come from private financial institutions shifting investments out of risky, high-yielding foreign financial products into safer assets such as U.S. Treasurys, analysts say....

The Japanese government itself hasn't acquired Treasurys in recent years. However, it may soon ramp up purchases, as officials at the huge government-run postal-savings system have said they are looking to diversify assets away from Japanese government debt and into U.S. government debt.

"The U.S. is having difficulty due to a lack of funds," Shizuka Kamei, the cabinet minister overseeing Japan Post, told reporters recently. "It's only natural that we should support the U.S. when it is weak."...

The rest of the article is well worth reading, and I'll leave the serious monetary analysis to the experts.  But two rather noteworthy things struck a layman like me about this big news.  First, other reports confirm that China's not really backing out of the United States - it's simply diversifying from short-term Treasury debt into long-term debt and other US assets (and also masking short-term purchases through offshore buyers).  So if this move is a Chinese "message" on US fiscal policy to President Obama, it's a subtle one, and one that's only targeted at the United States' (read: the White House's) short-term economic policies.  The Chinese still seem quite bullish about the US economy long-term.  Now, whether that commitment is by choice or necessity remains to be seen.

Second, I'm left wondering where's the public hysteria about Japan dramatically ramping up its purchases of US debt over the last few months to once again hold the title of "America's Top Banker."  As you may recall, when China took over the number one spot in the Fall of 2008, commentators on the right and the left were beside themselves with the news.  And the media reports were even more breathless.  For example, when the news was announced in 2008 the Washington Post wrote (emphasis mine):

China passed Japan to become the U.S. government's largest foreign creditor in September, the Treasury Department announced yesterday, reflecting the dramatic expansion of Beijing's economic influence over the American economy.

China's new status -- it now owns nearly $1 out of every $10 in U.S. public debt -- means Washington will be increasingly forced to rely on Beijing as it seeks to raise money to cover the cost of a $700 billion bailout....

The growing dependence on Chinese cash is granting Beijing extraordinary sway over the U.S. economy. Analysts say a decision by China to move out of U.S. government bonds, for economic or political reasons, could lead a herd of other investors to follow suit.  That would drive up the cost of U.S. borrowing, jeopardizing Washington's ability to fund, among other things, a stimulus package to jump-start the economy.  If China were to stop buying or, worse, start selling U.S. debt, it would also quickly raise interest rates on a variety of loans in the United States, analysts say.

Ominous!  On the other hand, a quick bit of Googling shows that yesterday's big announcement prompted zero commentary about "growing dependence on Japanese cash" or a future "decision by Tokyo to move out of US bonds."  The answer for this difference is simple: China is today's economic bogeyman, and thus everything it does is blown way, way, WAY out of proportion.  Thus, China's commercial decisions to buy US debt in 2008 were met with dramatic wailing and gnashing, while Japan's purchases of the same type of debt in 2009 (also for commercial reasons) receive none of the attendant commentariat angst.  News about China's economic moves elicits ridiculous reactions/predictions like those of the Post only 18 months ago (Beijing's "sway" over the U.S. economy over since 2008 hasn't been "extraordinary," and none of those scary things - "spiking" interest rates and fleeing "herds" of investors - has happened as China's debt purchases have stalled.)  Yet when Japan regains the "number one spot," the only commentary is about whether the Japanese government will invest in more US debt. 

Shocking, I know.

What I find most interesting about US journalists' and politicians' disparate treatment of China and Japan today is that Japan - today's economic pussycat - was America's big bogeyman only 25 years ago.  For example, here's the Amazon summary of a typical Japan-hysteria book from the 80s:

A Washington business consultant and former government trade negotiator, [Clyde] Prestowitz here analyzes economic and cultural differences underlying our trade deficit with Japan and the U.S. decline in international markets. He also examines efforts to resolve our free-trade dilemma.  Japan is a close-knit, exclusionary society, notes Prestowitz, with no room for U.S.-style individualism and little understanding of "fair" competition. Highly personalized Japanese companies with lifetime-employment policies cooperate as cross-shareowning groups to common advantage. By contrast, argues the author, when rival giants IBM and AT&T cautiously held back, independent young physicists and engineers "the small and the swift" created a spectacular global electronic industry, which Japan's government and industry, acting in concert, proceeded to preempt through investment, imitation and intense product development. Near-dominance in the American market ensued. What to do?

Yes, whatever shall we do?!  The Japanese government, with its complicit, productive and innovative  corporate conglomerates and its omnipresent trade surpluses just dominated us!  Damn that "free trade dilemma!"

Oh, wait.  (Sounds familiar, no?)

It's perspective like this that is utterly lacking from today's journalism and a key reason why all of the current hype and hysteria surrounding China's trade and monetary policies should be treated with serious skepticism. 

Despite what all of those "experts," "consultants," "officials" and "analysts" are telling us.