Japan Share of Europe Rescue Debt Slides as Yields Turn Negative

German Vice Chancellor Philipp Roesler
Philipp Roesler, Germany's vice chancellor. Photographer: John Macdougal/AFP/GettyImages

Japan’s share of purchases of European rescue bonds is sliding even as the government pledges to continue supporting efforts to resolve the euro region’s sovereign-debt crisis.

Japan bought 3 percent of the six-month debt sold by the European Financial Stability Facility last week, down from 8 percent at a similar sale in January, according to data provided by the Finance Ministry. In the latest sale, the bills had a negative yield, meaning investors get less than they paid when the debt matures.

Asian stocks fell today after German Vice Chancellor Philipp Roesler said yesterday that he’s very skeptical that Greece, a recipient of EFSF money, can be rescued. A Japanese finance ministry official said that the demand at last week’s auction, where bidding was 2.97 times the debt allocated, indicates the fund needs less assistance from Japan. He spoke on condition of anonymity because of ministry policy.

“Negative interest rates erode incentives to invest and such bonds aren’t a good tool to manage Japan’s euro-currency assets,” said Koji Ochiai, chief market economist at Mizuho Investors Securities Co. in Tokyo, one of 25 primary dealers obliged to bid at Japanese government debt sales. “Japan may reduce its EFSF investments gradually, while maintaining purchases to signal its support.”

In total, Japan has bought 8.7 percent of 67.4 billion euros ($82 billion) of EFSF debt, according to Bloomberg calculations from data provided by the ministry. That is down from 20.5 percent in January 2011, when sales first took place.

Supporting Europe

Japan continues to support Europe and decisions on EFSF purchases are made in accordance with the nation’s foreign-currency reserve management policies, the ministry official said last week. Japan hasn’t bought any of the rescue fund’s 20- or 25-year debt, according to the ministry.

The MSCI Asia Pacific Index dropped 1.5 percent as of 11:36 a.m. in Tokyo.

The rescue fund has a top AAA credit grade from Moody’s Investors Service and Fitch Ratings. It joined Belgium, Denmark, France, Germany, the Netherlands and Switzerland in attracting investors even with yields below zero.

Roesler, who is Germany’s economy minister, told broadcaster ARD that Greece is unlikely to meet its obligations under a euro-area bailout program as the nation’s international creditors -- the European Commission, the European Central Bank and the International Monetary Fund -- hold talks this week in Athens. Should that be the case, the country won’t receive more bailout payments, Roesler said.

Permanent Fund

The EFSF is a temporary vehicle, which will be replaced by a permanent fund, the European Stability Mechanism. Japan’s Yomiuri newspaper reported last week that Germany will ask Japan to buy bonds to be issued by the European Stability Mechanism, citing an interview with Volker Kauder, parliamentary leader of Germany’s Christian Democratic Union.

Spain’s banks are set for a bailout, and Greece, Ireland and Portugal have already had EFSF loans. While nations including China have indicated support for the rescue fund, the EFSF doesn’t publicly disclose how much each country buys.

The rescue fund was set up in 2010 and is backed by guarantees from euro-area governments. It has a total lending capacity of 440 billion euros, according to its website.

The EFSF last week auctioned the six-month bills at a yield of minus 0.0113 percent. Borrowing costs of the region’s higher-rated nations have plunged since the European Central Bank cut its benchmark interest rate to 0.75 percent and lowered its deposit rate to zero on July 5.

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