BOJ Should Buy Euro Bonds to Stem Yen’s Gain, Ex-MOF’s Ito Says

Bank of Japan Deputy Governor Hirohide Yamaguchi
Hirohide Yamaguchi, deputy governor of the Bank of Japan. Photographer:Haruyoshi Ymaguchi/Bloomberg

The Bank of Japan should consider buying euro bonds to help stem an advance in the yen against the common currency that is threatening the nation’s exporters, said Takatoshi Ito, a former Ministry of Finance official.

“We must realize that a much bigger plunge in the euro may occur,” Ito, who was deputy vice finance minister from 1999 to 2001, said in an interview in Tokyo on July 25. BOJ purchases would be “surprising” and show investors that Japan is supporting Europe while also taking measures to combat the yen’s strength, he said.

Ito joins former BOJ Deputy Governor Kazumasa Iwata and Takehiro Sato, who was appointed to the central bank’s policy board this week, in suggesting that the BOJ should weigh buying foreign-currency bonds. Europe’s sovereign-debt crisis has bosltered the yen’s appeal as a haven, driving it to an 11-year high against the euro.

Deputy Governor Hirohide Yamaguchi on July 25 signaled the central bank isn’t considering such purchases, saying that doing so to weaken the yen would be against the BOJ law, which stipulates that the government dictates currency intervention policy. That hurdle could be cleared if the Finance Ministry approves the transactions, said Ito, 61, who’s now an economics professor at Tokyo University.

Japan needs measures to counter the euro’s swings because companies haven’t sufficiently hedged against the currency and have been slower to relocate production facilities, measures they have taken to cope with the yen’s climb against the dollar, Ito said. Stocks of Canon Inc. and Ricoh Co. fell this week on investor concern about their dependence on Europe’s markets.

Yen Surge

Ito said the yen could climb as high as 70 yen per euro should the concern about the collapse of the single currency prompt investors to take money out of the region. The yen traded at 96:09 against the euro and 78.27 per dollar at 9:04 a.m. in Tokyo.

The BOJ should buy debt issued by the European Financial Stability Facility, and it may also need to consider purchasing sovereign bonds of Italy and Spain should the European Central Bank buy them, Ito said. Japan’s Finance Ministry has been purchasing debt from the fund, though the portion of its debt buys is falling, according to data provided by the Finance Ministry.

Unlike government purchases of the debt, which are paid for with euro holdings in the nation’s foreign-currency reserves, the BOJ could help weaken the yen by printing currency and selling it to buy euro bonds, Ito said.

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