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Does Japanese shadow cloud US credit picture? Most observers say no

It's easy to be worried. A single bloc of investors holds 30 percent of United States Treasury debt. If they defect, could there be a financial crisis? Talking about the Japanese, right?

Wrong. We're talking about state and local government officials, state and local retirement funds, and US insurance companies. Time after time they buy 30 percent or more of US Treasury bills and notes. But no one worries about their defecting, because they're part of the US financial system.

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And so, in many ways, are the Japanese.

Next week the US Treasury will begin auctioning off long-term notes and bonds as part of its huge quarterly refunding effort to raise money to finance the federal budget deficit. Once again there is concern about whether Japanese investors will bite the Treasury bait or go hunt elsewhere.

But several analysts familiar with Japanese investment say fear of a Japanese defection from the US bond market is unfounded. They argue that Japanese institutions make investment decisions in the same way that their counterparts in the US do, and that, like American investors, they usually act independent of one another, not en masse.

Sam Nakagama of Nakagama & Wallace, a New York-based economic advisory firm, calls Japanese investment in US Treasury debt ``about as stable as any other.'' He notes that US financial markets are ``large and resilient and offer kinds of investments that are not available in Japan.''

His sentiments are echoed by William V. Sullivan Jr., director of money-market research with Dean Witter Reynolds, the securities firm owned by Sears, Roebuck & Co.

``The Japanese have been important in [the purchasing] of long-term Treasury debt on and off in the last two years,'' Mr. Sullivan says. ``They concentrate on US Treasuries because of credit risk and liquidity.''

He points out that Japan does not have a well-developed debt market beyond 10 years but that financial institutions in Japan often need to buy longer-term instruments. An insurance company, for instance, has actuarial coverage that typically runs 20 years or more and must configure its portfolio with correspondingly long-term investments.

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``Hence,'' says Sullivan, ``they gravitate here for the [long-term Treasury] yields.''

Although the Japanese are big buyers during the four-times-a-year Treasury refunding, they are not that important when it comes to short-term debt. And even during these long-term episodes, says Sullivan, ``they have an important role, but on the margin. They are not the dominant influence on interest rates [in the US]. That is a function of many other factors.''

Even in head-to-head competition, dollar debt is more attractive than yen debt. In the past few years, a 10-year T-bill has paid as much as 400 basis points (four percentage points) more than a 10-year yen-denominated bill. With the dollar's having fallen steeply against the yen, however, there is more depreciation due to exchange-rate risk. But with bills of 10 years or so, exchange rates could reverse themselves several times by maturity.

What's more, at next week's auction, long-term differentials are still about 2 percent higher in the US than in Japan, and there are indications that the slide in the dollar against the yen has slowed or stopped.

Noting that US institutions invest heavily in Japan these days, Mr. Nakagama points out that Japanese money managers ``react just as US money managers react.'' Thus, he argues, if the US economy changes in a way that causes the Japanese to sour on holding that Treasury debt, American money managers would be just as likely to defect, too.

``In my view,'' says Nakagama, ``that's not likely to happen, and it's not happening now. Rates still are much lower over there than they are here.''

Sullivan at Dean Witter says that even in a worst case -- meaning a Japanese pullout -- interest rates would rise only slightly, and that rise would probably reattract Japanese investors and interest rates would ease again.

It is, in fact, not Japanese ownership of US debt that worries government and private economists. They usually applaud the purchases by Japanese institutions, since this allows US deficit financing to continue smoothly. Rather, they worry about the reasons behind the high deficit and the huge bankrolls in Tokyo. These, of course, are the whopping federal budget deficit and the record trade deficits between the US and Japan.

Japanese ownership of US debt has been ``blown out of proportion'' as an issue, Sullivan says.

``If they don't help us,'' Nakagama notes, ``interest rates would be much higher and we'd be in much more trouble.'' A Thursday column