One of the largest buyers of Japanese government bonds is under pressure to diversify its holdings in a move that will reverberate throughout the huge JGB market.

Shizuka Kamei, Japanese financial services minister, said on Monday that Japan Post Bank should diversify its investments into US Treasuries and corporate bonds in an effort to reduce the risks of over-concentration in JGBs.

“Nearly 80 per cent of Japan Post Bank’s funds go towards buying JGBs, but from now on [any increase in deposits] could go towards buying corporate bonds …and US Treasuries,” said Mr Kamei, who is also in charge of postal reform.

His comments come amid growing fears about the risks of sovereign debt after governments around the world have borrowed record sums to support ailing economies in the wake of the financial crisis.

“The US is having difficulty due to a lack of funds. It’s only natural that we should support the US when it is weakened so Japan Post Bank’s funds may go towards that,” said Mr Kamei.

Standard & Poor’s last week warned that it might cut its sovereign debt rating on Japan due to concerns that the policies of the Democratic party-led government did not include sufficiently aggressive action to tackle Japan’s chronic budget deficit and huge debt burden.

The Japanese Diet approved a secondary supplementary budget last week and is set to debate a record budget for the new fiscal year starting in April.

Mr Kamei said he expected deposits at Japan Post to increase substantially as a result of a restructuring, which the government is poised to announce this month.

The postal bank is by far the largest Japanese bank by deposits. Its Y176,990bn ($1,950bn) in deposits as of September exceed the $1,430bn in deposits at ICBC, China’s largest bank.

A big shift by the postal bank away from JGBs could have unsettling implications for the market. Japan Post helped digest 45 per cent of the increase in outstanding JGBs between 2001 and 2007 and already holds about 24 per cent of outstanding JGBs, according to Ruixue Xu, rates strategist at Royal Bank of Scotland in Tokyo.

However, analysts do not expect Japan Post to shift away from JGBs immediately.

Although it has attempted to expand lending since it was privatised in 2007, Japan Post has largely failed to make inroads in new businesses and remains dependent on buying JGBs.

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