TOKYO (Dow Jones)--Japan should consider holding Chinese government bonds to strengthen ties with its Asian neighbor, the finance minister said Tuesday, but analysts say such a step could be a move toward diversifying Japan's foreign reserves, now mainly denominated in dollars.
Finance Minister Jun Azumi made the comments just days ahead of a planned visit to China by Prime Minister Yoshihiko Noda. It was the first time Japan clearly indicated an intention to shift part of its foreign reserves into yuan-denominated Chinese debt.
"It is true that we've been having discussions that could bring huge advantages to (both Japan and China) if we make it possible for both sides to buy each other's government bonds," Azumi told a news conference.
"Our country currently has no Chinese bonds. My assessment is that our holding those products would be beneficial to building relationships between us," he said.
Japan's $1.3-trillion reserves are second in size only to China's. They are currently held mainly in U.S. Treasury bonds, with a small portion in euros.
Japanese officials said the two sides were seeking a deal on various forms of cooperation during Noda's two-day visit from this Sunday, including a plan to hold each other's sovereign debt.
The Nikkei reported Tuesday that Japan is considering investing as much as $10 billion in Chinese government debt over time.
The purchases may be part of efforts to mend ties strained by differences over wartime history and recent territorial disputes. But analysts say it may also be an attempt by Tokyo to protect the value of its foreign reserves in the face of the persistently strong yen.
"The aim of this action would be diversification of Japan's foreign reserves and helping China make its currency more internationally popular," said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.
With the yen near a record-high against the dollar, Japan's has unrealized losses of tens of trillions of yen in its foreign reserve account.
But Azumi said any investments in Chinese debt wouldn't mean Japan was moving away from the dollar and the euro. Even a $10 billion investment in the yuan would be less than 1% of Japan's total reserves.
A Japanese official familiar with the matter said China will effectively determine how much of its debt can be bought by Japan, and there has been no decision yet on the amount.
The official also said it would be wrong to expect Tokyo to start investing in Chinese debt immediately after Noda's trip. Even if such purchases are made, they made not be publicized, he added.
Japan has so far not invested in Chinese debt. But Beijing stepped-up its buying of Japanese government debt in 2010, surprising Japanese officials and drawing calls by some lawmakers for China to allow Japan to buy its debt as well.
-By Takashi Nakamichi, Dow Jones Newswires; +81-3-6269-2818; email@example.com
-Takashi Mochizuki contributed to this article