The Chinese foreign reserve

The rival sovereignty claim over some uninhabited islands - known as Senkaku in Japan and Diaoyu in China – caused a diplomatic spat between the two Asian giants. A Chinese fishing boat captain was detained by the Japanese authorities. Demands and protests were made for the freeing of the captain. Other diplomatic channels were also deployed.

In the financial market, China applied pressure on Japan by buying substantial quantities of Japanese bond. It purchased a total of $25.5 billion in the first 7 months of this year. This purchase, made with Yen bought from the open market, drove up the value of the Yen. The Yen had appreciated by 15% against the dollar since April. What is most infuriating for the Japanese is that the Chinese can buy their bonds, but they are no means for a reciprocal action.

The Japanese eventually released the Chinese captain. Almost simultaneously, the Chinese sold down their holding on Japanese bonds. This episode illustrates the mightiness of the huge Chinese foreign-exchange reserve. You can expect to see more flexing of this muscle in the future.