TOKYO - Japanese Finance Minister Jun Azumi said on Tuesday that the country is discussing with China possible purchases of Chinese government bonds.

The talks are a sign that Japan is diversifying its foreign-exchange holdings by tapping into the world's second-largest economy.

"I think it's mutually beneficial" for the two countries to be investing in one another's debt, Azumi said at a news conference in Tokyo. "We're not abandoning the dollar or euro, but we're adding the yuan to deepen our relationship."

Japanese Prime Minister Yoshihiko Noda signaled in September last year as the nation's finance chief that Japan should have the ability to invest in China's market given that the Chinese are buying Japanese debt. Japan holds $1.22 trillion of foreign-currency reserves, the world's largest after China.

Noda will discuss the bond purchases when he meets his Chinese counterpart later this month, Azumi said, adding that the government has not made a final decision on this issue.

"It's another step forward in the path of yuan internationalization," said Liu Dongliang, a senior analyst in Shenzhen at China Merchants Bank Co, the nation's sixth-biggest bank. "It shows yuan-denominated assets are becoming more and more attractive. But the quota may be small because China will be cautious in allowing foreign governments to invest in Chinese government bonds."

Central banks from Thailand to Nigeria plan to start buying yuan because slowing global growth has capped interest rates in the United States and Europe. Investment has become easier for central banks as issuance of yuan-denominated bonds in Hong Kong more than tripled to 112 billion yuan ($17.6 billion) this year and institutions were granted quotas to invest onshore.

The Nikkei newspaper reported on Tuesday that Japan was in talks with China to purchase the debt. Japan's discussions about buying yuan-denominated debt come at a time when investors are seeking alternatives to US Treasuries and European debt.

Bloomberg News