Curiously, however, the main actor in yesterday's drama wasn't the Bank of Japan or Japan's Ministry of Finance. It wasn't even the US Federal Reserve. The principal character was China's State Administration of Foreign Exchange, which managed to dominate the performance even though it wasn't in the theatre, let alone on the stage.

That might sound counter-intuitive, especially given Japan's long history of intervening in the foreign-exchange market to help out exporters by holding down the value of the yen. In 2004, for example, the BOJ sold almost 15 trillion yen in just three months to block the currency's unwelcome appreciation against the dollar.

This time around, however, things are subtly different. One of the main reasons the yen has been so strong recently is that the managers of China's foreign reserves have been buying up Japanese assets - mainly short-term government debt - as part of their efforts to diversify Beijing's US$2.5 trillion in assets away from the US currency and from US Treasury debt.

That buying has had a major impact on Japan's exchange rate. According to Japan's Ministry of Finance, over the first seven months of this year, China bought a net 2.3 trillion yen in Japanese assets, compared with net sales of 2.5 billion yen over the same period in 2009 (see the second chart). To fund those purchases, China's reserve managers have had to sell some of the US dollars accumulated through their own foreign-exchange market intervention to buy yen.

Although the amounts involved are not huge by the standards of the foreign-exchange market, the clear channelling of official Chinese funds into the yen has encouraged other market players to jump on the trend and buy the Japanese currency, magnifying the flow. The net effect has been to push the yen up to a 15-year high against a weakening dollar.

But whether Beijing's attempt to diversify its foreign-exchange reserves will actually achieve anything worthwhile is extremely doubtful. Although observers have made a great song and dance about the yuan's own rise yesterday to a 15-year high against the dollar (see the third chart), the appreciation has been tiny. Since the yuan's revaluation almost three months ago, the currency has climbed just 1.25 per cent.

With China earning net trade receipts of US$20 billion a month or more and attracting inward investments at a record pace - US$66 billion so far this year - Beijing is still intervening at a furious rate to prevent a runaway appreciation of the yuan.

And because the funds flowing into China are denominated overwhelmingly in dollars, that intervention necessarily involves buying the US currency, which Beijing's reserve managers are then forced by a lack of alternatives to invest in US government debt.

This makes Chinese officials angry. They would love to diversify their holdings, and have repeatedly threatened to dump US debt. On Tuesday, for example, an official at the State Council's Development Research Centre said a Chinese sell-off would have 'a disastrous impact on the United States' economy'.

In reality, however, yesterday's foreign-exchange market intervention proves that sales of dollar assets by Beijing would have little or no impact on the US economy.

That's because if China sells dollar assets, it has to buy something else with the proceeds, in this case yen-denominated debt. In turn, that pushes up the yen against the dollar, which prompts the BOJ to sell yen and buy dollars. That leaves the BOJ's own reserve managers holding dollars, which they will inevitably park in US government debt.

As a result, the US government is still able to sell its debt happily enough.

And all that Beijing has achieved is to switch a portion of its reserves out of the bonds of a government with a 90 per cent debt-to-gross domestic product ratio yielding 2.6 per cent and into the debt of a government with a 170 per cent debt-to-GDP ratio yielding just 1.1 per cent.

Oh, and of course, China also sustains a nasty currency valuation loss on its new bonds when Japan then responds to the switch by intervening to push down the yen.

In effect, all Beijing has achieved is to outsource its purchases of US government debt to Japan - and to pay a heavy fee for doing so.