Japan to Buy European Debt With Currency Reserves to Weaken Yen

Photographer: Kiyoshi Ota/Bloomberg

One-hundred euro, from top, U.S. one-hundred dollar, and ten-thousand yen banknotes. Close

One-hundred euro, from top, U.S. one-hundred dollar, and ten-thousand yen banknotes.

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Photographer: Kiyoshi Ota/Bloomberg

One-hundred euro, from top, U.S. one-hundred dollar, and ten-thousand yen banknotes.

Japan plans to use its foreign- exchange reserves to buy bonds issued by the European Stability Mechanism and euro-area sovereigns, as the nation seeks to weaken its currency, Finance Minister Taro Aso said.

“The financial stability of Europe will help the stability of foreign-exchange rates, including the yen,” Aso told reporters today at a briefing in Tokyo. “From this perspective, Japan plans to buy ESM bonds,” he said. The purchase amount is undecided, Aso said.

The move may help Prime Minister Shinzo Abe temper criticism of Japan’s currency policies from trading partners such as the U.S. The yen has fallen around 8 percent against the dollar since mid-November on Abe’s pledge to reverse more than a decade of deflation as his Liberal Democratic Party won an election victory last month.

“The Europeans would be happy to see Japan buy ESM bonds, so Japan can avoid criticism from abroad and at the same time achieve its objective,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former central bank official.

The yen erased gains after Aso’s comments, reaching 87.81 per dollar, before appreciating again to 87.51 as of 7:14 a.m. New York time. The Japanese currency appreciated 0.3 percent to 114.86 per euro.

The ESM held its first debt auction today, selling 1.9 billion euros ($2.5 billion) of three-month bills at an average yield of minus 0.0324 percent. Investors placed bids for 6.2 billion euros of the securities, the Bundesbank said.

‘Political Move’

Marshall Gittler, head of global foreign-exchange strategy at IronFX Financial Services in Cyprus and a former yen strategist at Deutsche Bank AG in Tokyo, said he doesn’t think the plan will have a significant impact on the Japanese currency.

“This might be more of a political move to counter any criticism that the Europeans might have about any other steps that Japan might take to weaken the yen,” he said. “So watch out for the next shoe to drop.”

The U.S. criticized Japan for undertaking unilateral sales of the yen in 2011, after Group of Seven economies jointly intervened to weaken the currency in the aftermath of the record earthquake and tsunami that year.

“Rather than reacting to domestic ‘strong-yen’ concerns by intervening to try to influence the exchange rate, Japan should take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy,” the Treasury Department said in a report in December 2011.

Reviving Growth

Last month, Aso said other countries have “no right” to criticize Japan’s currency policies, saying that the U.S. should have a stronger dollar. He also questioned whether major Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations.

Abe faces the task of reviving growth after the economy contracted in the second and third quarters of last year, meeting the textbook definition of a recession. The nation’s industrial output tumbled more than forecast in November to the lowest level since the aftermath of 2011’s quake.

The ESM replaces the temporary European Financial Stability Facility, and the two funds will run in parallel until the EFSF is phased out in mid-2013. The EFSF was formed in 2010 to provide loans to cash-strapped European Union countries.

The ESM’s birth was eased by the European Central Bank’s offer to buy bonds of fiscally struggling countries, which has driven down interest rates in Spain and Italy and bought European governments time to address the root causes of the crisis.

“Japan considers ESM bonds a major investment tool just like euro-denominated sovereign bonds” Aso said today.

Japan purchased about 7 billion euros of EFSF bonds, or 6.7 percent of total issuance, between the lender’s first auction in January 2011 and the end of 2012, according to the Finance Ministry.

Japan held $1.27 trillion in foreign reserves as the end of November, according to finance ministry data.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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