Japan gains on China in dollar race

February 15, 2011, 7:49 PM UTC

In the be careful what you wish for department, Japan may soon pass China as the biggest official U.S. creditor.

Japan added modestly to its official Treasury holdings in December, according to data released Tuesday by the government, while China trimmed its stated U.S. government bond position.

Dollar daze?

The shifts leave China with $892 billion of declared Treasury holdings and Japan with $884 billion. Were the countries to repeat December’s actions in January, Japan would unseat China as the biggest official holder of U.S. government debt for the first time since the fall of 2008.

The report comes as inflation-plagued China passes recession-addled Japan as the second-biggest economy in the world.

Treasury’s monthly numbers are widely reported because they offer a window into deficit-riddled America’s relationships with its two biggest overseas lenders.

It is not the clearest window, alas: China’s actual holdings of U.S. government bonds are more than twice the official total, Fed chief Ben Bernanke told Congress last week.

Even if Japan does unseat China as the country with the largest official position in Treasury securities, it won’t change the fact that China continues to run a trade surplus with the world and to invest the proceeds of its trade gains largely in safe government bonds — which is why its dollar stash continues to grow, regardless of what the official numbers might say.

Of course, as the U.S. fiscal position grows ever more dire, the definition of “safe” comes under increasing scrutiny. Still, money continues to flow in: Foreigners acquired $66 billion of U.S. long-term securities, mostly Treasury bonds, in December.

For all the talk of yuan liberalization and the rise of the International Monetary Fund’s special drawing rights, it is clear that for the foreseeable future the dollar is the only game in town.

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