Top creditors China, Japan step up concerns over U.S. shutdown

Reuters

By Ben Blanchard and Yuko Yoshikawa

BEIJING/TOKYO, Oct 8 (Reuters) - China and Japan, the UnitedStates' biggest creditors, are increasingly worried the U.S.government shutdown and standoff over the debt ceiling couldwreak havoc on their trillions of dollars of investments in U.S.Treasury bonds.

Beijing and Tokyo have publicly called on the White Houseand Congress to resolve the dispute, which could threaten a U.S.debt default as soon as next week, and Asia's two biggesteconomies are privately urging Washington to find a solution.

Japanese officials held several emergency telephoneconferences with U.S. Treasury Department officials on Monday,Japan's Nikkei newspaper reported, citing unnamed sources.

Tokyo urged the Americans to hammer out a deal to increasethe debt ceiling or risk a default that could plunge financialmarkets into turmoil, the newspaper said on Tuesday.

Finance Minister Taro Aso on Tuesday said it was necessaryto bear in mind the threat that the fiscal standoff posed to thevalue of U.S. bonds.

Similarly, Chinese Vice Finance Minister Zhu Guangyao saidon Monday that Beijing had been in touch with Washington overthe standoff, in which House Republicans have refused toincrease the debt ceiling as they seek changes in PresidentBarack Obama's signature healthcare law.

The standoff is in its second week, with much of the U.S.federal government closed and no signs of a breakthrough,although some glimmers of hope emerged on Monday as Obama saidhe would accept a short-term increase in the nation's borrowingauthority to avoid a default.

The world's biggest debtor and creditors are caught in adelicate balance that neither wants to disturb. As at July 31,China held $1.28 trillion in U.S. Treasury bonds and Japan held$1.14 trillion, according to Treasury Department data.

The last big confrontation over the debt ceiling, in August2011, ended with an 11th-hour agreement under pressure fromshaken markets and warnings of an economic catastrophe if adefault were allowed to happen.

China is "naturally concerned about developments in the U.S.fiscal cliff," Zhu told reporters, saying it was Washington's"responsibility" to avoid a debt crisis and ensure the safety ofChinese investments.

Japan has previously expressed its concerns in diplomaticterms. Aso and Chief Cabinet Secretary Yoshihide Suga both saidlast week that the fiscal standoff was essentially a U.S.domestic problem.

But Aso added the shutdown could push up the yen against thedollar -- a concern for Japan's export-reliant economy, whichhas benefited from a yen decline since Prime Minister Shinzo Abewon election in December on a reflationist policy platform.

Should the U.S. default on its debt, which the TreasuryDepartment says could happen as soon as Oct. 17, "there would bea large international impact," Aso said last week. "If there isno prompt resolution, various impacts will emerge."

The yen has been rising this month as investors shed riskand seek the perceived safe haven of the Japanese currency. Thedollar slipped on Tuesday to a two-month low of 96.55 yen.

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