HONG KONG : Japan is seeking discussions with China over the mainland's record purchases of Japanese government bonds (JGBs).

It wants to know the reasons behind the move, according to Finance Minister Yoshihiko Noda, during a session of the upper house financial affairs committee.

He went on to suggest that it was inappropriate for China to buy Japanese bonds without the ability for the Japanese to do the same in the Chinese market.

A spokesman from China has come out to defend its action, saying that China invests its foreign-exchange reserves based on its own needs and other factors such as liquidity and returns.

The reason for the raised eye-brows by the Japanese is that Chinese investors bought a net US$7 billion worth of bonds in July, almost 30 per cent higher than in the previous month.

And the purchases have led to greater demand for the yen - at a time when the strong currency is threatening to undermine Japan's economic recovery.

Currency traders say the amount of bonds that China is buying is too small to push the yen up, but it could indirectly be helping to keep the Japanese unit on the uptrend.

On China's part, authorities have been actively trying to diversify its vast US$2.5 trillion-dollar reserves away from US-dollar denominated securities.

In addition to buying JGBs, China has also been scooping up more South Korean bonds.

Japanese debt is attractive because 95 per cent of it is held by domestic investors, so the risk of a default is perceived to be much lower than other debt-ridden countries.

From Japan's point of view, it is dealing with a currency that is at 15-year highs against the dollar.

Japanese businesses have been warning that their overseas earnings are under threat. A survey last week showed that almost half of manufacturers expect their sales to be hit.

China, in contrast, has kept the yuan's gain to less than 1 per cent against the dollar since June, while in the process accumulating foreign exchange that it needs to invest.

- CNA/al