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According to U.S. comparatively low savings rate makes economy to heavily depend on foreign investment inflows from Japan which has high savings rates so as to help promote growth as well as to help poorly funded federal budget. Japan has arbitrated much in trade markets therefore limiting the yen’s appreciation. Because of this, Japan has proceeded to be the world’s fastest and largest developing controller of foreign exchange reserves (FER) (Morrison, 2008).
Japan has devoted a large portion of its Foreign Exchange Rate in U.S. bonds amounting to hundreds of billions. Such securities vary from U.S corporate debt, U.S. agency debt, Treasury debt, as well as US equities. This foreign exchange investment by Japan will affect U.S. interest rate when investment in treasury securities reduces. This notion is expressed by a number of policymakers from U.S. arguing that will cost the U.S. in the event of Japan uses its large control of securities in the U.S. as leverage. For instance, various Japanese government experts are reported to have suggested that Japan could withdraw a large portion of its controls in order to prevent the United States from upholding trade sanctions against Japans’ economic policy.
How the bond market will be affected
Morrison (2008) observes that, gradual fall in Japan’s fortune of U.S. properties would not be expected to have negative effects on the U.S. financial status. Consequently, experts argue that attempts by Japan to withdraw large portions of its holdings in U.S. properties might have significant negative effects on the U.S. economy. The value of the dollar would depreciate in the international markets. Besides it would prompt other foreign investors to sell off their U.S. properties as well.
In order for the U.S. to retain or attract such investment back, its interest rates would raise which therefore might diminish U.S. economic growth. Other economic experts oppose that it would not be in Japanese economic interest to suddenly dispose off its U.S. investment properties. They argue that such a move could lead to financial losses for the Japanese government, and any repercussions to the U.S. economy resulting from this action could largely hurt Japan’s economy as well (Morrison, 2008).
Various property bonds offered by the U.S. Treasury which are supported by credit of the U.S. government which are also regarded as safety against risks will attract few interests from investors. Besides, in the event that Japan which is major investor is selling off their holdings from the U.S. means that these bonds will realize low demand due to the risk posed. Relative bonds will, callable bonds as well as short term bonds will record low market demand. For instance, there will be decline in interest rates for mortgaged backed properties due to few interests from mortgage holders to repay or refinance loans thereby creating an early return of the initial amount borrowed by loan holders (Morrison, 2008).
Due to its low savings rate, the U.S. borrows in order to finance the regional budget deficit and its capital needs so as to have healthy economic development. This then shows that the U.S. largely depends on countries with high savings rates like Japan which invests part of its investment in the U.S.
Japan’s central bank is a major consumer of United States property due to its effective policy on foreign exchange rate. In order to moderate the Yens’ appreciation towards the dollar, Japan’s central bank s obliged to purchase U.S. dollars. This policy has made Japan to amass a considerable amount of foreign exchange reserves. Japanese central government has exchanged part of its foreign exchange reserves assets into financial bonds instead of Japan to keep the U.S. dollars that earn no interest (Morrison, 2008). Besides, the central bank will hold securities from other foreign states because foreign exchange control facilitates trade and prevents speculation against their currency.
According to recent statistics, Japan has accumulated large controls of U.S. property. Effects of these accumulations are due to United States borrowing so as to finance its large operations deficit with Japan. Comparably, Japanese government procurements of United States properties increase the demand for U.S. ventures therefore reducing United States interest rates. It is estimated that Japan’s withdrawal from long-term U.S. bonds will increase interest rates. These higher interest rates would .............
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