Japan increased its holdings of U.S. government debt for an eighth straight month in January. But the second-largest holder of U.S. Treasury bonds will likely scale back its purchases of foreign holdings, and even sell off some, in coming months to divert money toward rebuilding a nation devastated by a powerful earthquake and an ensuing nuclear crisis.
The Treasury Department said Tuesday that Japan boosted its holdings 0.4 percent to $885.9 billion in January.
Economists said a reduction in Japan's foreign holdings would put some upward pressure on U.S. interest rates. But they cautioned the change would have a limited impact.
The Federal Reserve, which has been buying Treasury securities as part of its efforts to keep interest rates low, would move to counteract any significant increase in rates, they said.
"Any impact from the sales would be short-term and relatively small," said Nariman Behravesh, chief economist at IHS Global Insight.
The Treasury report showed that China, the second-largest holder of U.S. debt, reduced its holdings for a third straight month, trimming them 0.5 percent to $1.15 trillion.
Overall, foreign holdings of Treasury securities rose 0.3 percent to $4.45 trillion in January. This data is carefully followed to determine whether foreign countries still have an appetite for Treasury debt at a time of record federal deficits.
Interest rates could rise if the biggest buyers of U.S. debt began trimming their holdings significantly. That would slow America's economic recovery and increase Washington's costs for financing the $14.3 trillion national debt.
But Gregory Daco, another economist at IHS Global Insight, said the crisis in Japan makes Treasury securities more attractive, as does unrest Middle East and other problems facing the global economy. That's because U.S. Treasurys are considered to be among the safest investments.
Analysts at Bank of America-Merrill Lynch noted that the Bank of Japan announced a major asset-purchase program on Monday aimed at supporting the Japanese economy. They said part of that program will likely include further purchases of U.S. Treasury securities. That would ensure the Japanese yen does not strengthen against the dollar and hurt Japanese exports.
"We believe this buying program will be the dominant story (affecting U.S. Treasury demand) over the near-term," Ethan Harris, chief economist at Bank of America-Merrill Lynch, said in a note to clients.