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Economy Watch
Economy Watch follows the progress of the world economy and offers you our weekly picks. Be sure to visit for the weekly updates.
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February 25 Updates
| Japan surpassed China as largest holder of U.S. Treasury securities
China trimmed its holdings of U.S. debt by 34.2 billion U.S. dollars in December 2009, leaving Japan as the largest holder of U.S. Treasury securities, the U.S. Treasury department reported on Tuesday.
The figures reflect demand for U.S. Treasury obligations and other assets, including stocks and government agency debt, a key to funding the massive U.S. balance of payments deficit with the rest of the world.
According to the Treasury International Capital (TIC) report, foreign holdings of U.S. Treasury securities fell by 53 billion dollars in December, surpassing the previous record drop of 44.5 billion dollars in April 2009.
The 53-billion-dollar decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell by 52.3 billion dollars. The holdings of foreign private investors fell by 700 million dollars during December.
While China cut its holdings of the U.S. long-term securities, Japan and Britain increased their stakes.
Japan boosted its holdings of U.S. Treasuries by 11.5 billion dollars to 768.8 billion dollars in December, outpacing China's December total of 755.4 billion dollars.
Next on the list, Britain also increased its holdings to 302.5 billion dollars from 277.6 billion dollars in November.
Brazil lifted its holdings to 160.6 billion dollars in December from 157.1 billion dollars in the previous month.
The next release, which will report on data for December 2009, is scheduled for March 15.
The reductions in holdings, if they continue, could force the U.S. government to make higher interest payments at a time when it is running record federal deficits.
For all of 2009, foreign holdings of U.S. Treasuries dipped by 500 million dollars. In 2008, foreigners had increased their holdings of U.S. Treasuries by 456 billion dollars as a global financial crisis triggered a flight to the safety of U.S. government debt.
The U.S. government on Feb. 1 released a new budget plan which projects that the deficit for fiscal year 2010 ending in September will total a record 1.56 trillion dollars.
Critics say the trillion-dollar-plus deficit will not be sustainable and will eventually damage the economy.
The Obama administration has pledged to begin addressing the huge government deficits and he will soon appoint a commission to recommend ways to trim future deficits.
Factors that lead to a recent high inflation rate in Britain
Britain's benchmark Consumer Prices Index (CPI) rate of inflation rose to 3.5 percent year-on-year in January, according to official figures released on Tuesday, pushed to the 14-month high by an increase in Value Added Tax (VAT) to 17.5 percent, higher oil costs and the effects of sterling's depreciation.
The rise comes after December's rise in the CPI of 0.6 percent, which took it to 2.9 percent.
This latest rise to 3.5 percent has led to Mervyn King, governor of the Bank of England (BoE), Britain's central bank, to write a public letter of explanation to Alistair Darling, the chancellor of the exchequer.
King forecast that inflation was likely to fall back towards its target level of 2 percent later in the year.
In his letter to the chancellor, King outlined the causes of the rise. "Three short-run factors have driven the current measured rate of inflation up.
First, the restoration of the standard rate of VAT is raising prices relative to a year ago."
"Second, over the past year, oil prices have risen by around 70 percent. That is pushing up petrol-price inflation significantly, which, in turn, is raising overall CPI inflation."
"Third, although the exchange rate has been broadly stable over the past year, the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices."
King said that the BoE Monetary Policy Committee (MPC), which sets interest rates, expected the current rate of inflation to be only temporary with spare capacity in the economy pulling inflation down.
King added that in the medium term inflation was "more likely than not" to slip below the 2 percent target for a period.
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