Japanese Reduce Foreign Bond Holdings : Investing: Higher domestic interest rates and a stronger yen were behind last year’s cut. Additional selloffs could hurt the United States.

TOKYO —  Big Japanese investors slashed their holdings of foreign bonds in 1990 to the lowest level in six years because of higher domestic interest rates and the stronger yen.

The trend could have repercussions for the United States, because the diminished Japanese appetite for foreign bonds threatens to curtail what has been a crucial source of financing for Washington.

The yen’s strength during the past year against most major currencies made assets abroad riskier for yen-based investors, fund managers and bond analysts said. The dollar, which was worth about 144 yen early last year, had fallen to about 134 at year-end. It stood at 134.50 Thursday.

Meanwhile, key Japanese interest rates have risen. The closely watched discount rate, charged by the central bank, rose to 6% last August from 5.25%.

Largely as a result of these trends, Japanese investment in foreign bonds will total just under $30 billion in 1990, less than one-third the record $94.1 billion invested in 1989, fund managers and bond analysts estimate.

Foreign bond investment stood at $20.9 billion at the end of November, according to the latest data from the Ministry of Finance, and December investment is unlikely to break the declining trend, experts said.

Asahi Mutual Life Insurance Co.’s holdings in foreign bonds were under 20% of the total balance, down from about 25% in 1987, said Shinichi Toki, manager at the insurer’s asset allocation and planning department.

The dollar’s relative weakness against the yen has shrunk investors’ interest in U.S. assets. And continued dollar weakness would keep interest lukewarm at best.

U.S. Treasury securities currently comprise an estimated 30% of Japanese foreign bond investments, down from about 50% in 1985, bond dealers said.

Not only are investors holding back on fresh investments, but some life insurers and investment trusts have started actively selling Treasuries from their portfolios, fund managers said.

“Just look at Japanese bidding at the last quarterly refunding, and it’s obvious where money is not going,” one foreign bond trader said.

Japanese investors bought only 20% to 25% of the U.S. Treasury auction last November, down from the more typical 30% at other recent sales.

Instead, investors are increasingly buying domestic bonds, investment managers said. As interest rates have risen, the yields on long-term Japanese government bonds have come closer than usual to the yields on comparable U.S. Treasuries.

For example, the Japanese government’s 10-year bond is yielding about 6.87%, up from 6.17% a year ago. The current yield is well within 1 1/2 points of U.S. bonds with a similar maturity.

While investment in European bonds rose early last year, political and economic uncertainty in the Soviet Union made that niche shaky, fund managers said.