Japan 'Would Avoid Dollar Bonds'

Japan's opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected.

The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar.

Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.

But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.

"If it's [in] yen, it's going to be all right," Mr Nakagawa said in an interview with the BBC World Service.

"We propose that we would buy [the US bonds], but it's yen, not dollar."

However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa's party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party.

Risk

Such yen-denominated bonds would mean that America, rather than Japan, would be exposed to the risk of future falls in the value of the US currency.

Mr Nakagawa's demand echoes doubts about the future of the dollar expressed earlier this year by the Chinese Premier and the governor of China's central bank.

Both China and Japan have run large trade surpluses with the US for many years and have tended to invest the dollar surpluses in safe US Treasury bonds.

But both countries are worried that the value of these foreign exchange holdings could be jeopardised by a fall in the dollar.

Beijing, for example, has said it will issue its own bonds to fund any further lending to the International Monetary Fund and is believed to be diversifying out of dollars and into euros.

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