(Ecns.cn)--Japan is discussing with China the possible purchase of up to 10 billion US dollars worth of Chinese government bonds, Japanese Finance Minister Jun Azumi acknowledged on Tuesday.
The talks came ahead of a meeting to be held this Sunday between Japanese Prime Minister Yoshihiko Noda and Chinese President Hu Jintao.
Azumi said: "It would be mutually beneficial for one country to invest in the government bonds of another country. There will not be a big reduction in Japan's holdings of US treasury securities and eurozone debt, but we will invest more in the Chinese yuan in order to further relations with China."
If the deal is successful, Japan would become the first country within the Group of Seven industrialized nations to hold Chinese yuan-dominated bonds in its foreign exchange reserves. That would be a huge stamp of international approval for the Chinese currency.
Liu Yuhui, director of the China Economic Evaluation Center at the China Academy of Social Sciences, told the People's Daily: "China welcomes foreign governments to hold its currency in their assets on the condition that the investments are made under Chinese regulations."
Japan's nearly $1.3 trillion in foreign exchange reserves, the world's second largest after China, are largely held in US dollars. The Japanese yen has considerably strengthened against US dollars this year. Finance experts say it is a wise choice for Japan to avoid putting all of its eggs in only one basket.
Xie Taifeng, dean of the School of Finance at Capital University of Economics and Business, said Chinese government bonds are much less risky at the moment compared to its US and eurozone counterparts.
While investors see no end in sight to the eurozone debt crisis and the United States raises its debt ceiling again and again, China has controlled its budget deficit to less than 3% of its GDP, generally considered a safe limit.
"Despite a sluggish world economy caused by the financial crisis, China has managed to maintain its GDP growth above 8% and kept a steady but gradual rise in its currency against US dollars," said Xie.
Since Japan does not hold any Chinese yuan at present, it has to pay in Japanese yen or other foreign currency to purchase the bonds, which will contribute to China's already abundant foreign exchange reserves of $3.2 trillion, added Xie.
