The End of Japan’s Buying Spree?

From Bloomberg:

Japan to End Yen Sales, London Times Says

March 29 (Bloomberg) — U.S. 10-year Treasury notes fell, pushing yields to their highest in more than three weeks, after the London-based Times said the Bank of Japan may end yen sales, fueling speculation it will buy less U.S. government debt.

Accelerating economic growth means Japan no longer needs a weaker currency to boost exports, the Times said, citing unidentified officials at Japan’s central bank, which buys and sells yen on behalf of the Ministry of Finance. The BOJ typically buys U.S. debt with the proceeds of dollar purchases. A ministry official said Japan’s currency policy hasn’t changed.

Such rumors have been floating around for over a week now, but the fact that they persist and seem to be gaining credibility may be significant. The telltale sign will be if they allow the yen to fall below about 105 yen/dollar, since that seems to have been where they’ve dug their heels in up to now:

The drop in the yen/dollar exchange rate below 105 would have a minimal impact on the US economy, at least this year. However, given that Treasury data shows that Japan has recently been buying a net of $20-25bn in US government bonds per month, if Japan were to stop buying US treasuries there could be an effect on long-term interest rates. Exactly how much long-term rates will rise is the $64,000 question.