Through the Wire

Japan to Buy ESM Bonds as Abe Steps Up Bid to Weaken Yen

January 8, 2013
| Economics
| Asia and the Pacific, Europe
Jan. 8 (Bloomberg) -- Japan will buy bonds issued by the European Stability Mechanism and euro-denominated sovereign debt, a strategy that Finance Minister Taro Aso said will help weaken the yen and support Europe.

The transactions will be funded by Japan’s foreign exchange reserves, Aso told reporters today at a briefing in Tokyo. The purchase amount is undecided, he said.

“The financial stability of Europe will help the stability of foreign exchange rates, including the yen,” Aso said. “From this perspective, Japan plans to buy ESM bonds.”

The move may help Prime Minister Shinzo Abe weaken the yen while tempering criticism of his currency policies from trading partners such as the U.S. and South Korea. The yen has fallen around 8 percent against the dollar since mid-November on Abe’s pledges 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 pared gains after Aso’s comments, briefly weakening before trading at 87.52 as of 1:03 p.m. in Tokyo.

The ESM will hold its first debt auction later today, offering three-month notes worth about 2 billion euros ($2.6 billion).

U.S. Criticism

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.

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.

JPMorgan’s Kanno said Japan may be pursuing an alternative means of currency intervention by using the yen to buy ESM bonds, resulting in a weaker Japanese currency and a stronger euro.

Reviving Growth

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 in August 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 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.

Editors: Andrew Joyce, Scott Lanman, and Paul Panckhurst

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