Japan Will Buy Euro-Region Bonds, Joining China to Avert Crisis

By Toru Fujioka and Aki Ito
Jan. 11 (Bloomberg) -- Japan plans to buy bonds issued by Europe’s financial-aid funds, its finance minister said, joining China in assisting the region as it battles against a debt crisis that prompted bailouts of Ireland and Greece.
“There is a plan for the euro zone to jointly issue a large amount of bonds late this month to raise funds to assist Ireland,” Finance Minister Yoshihiko Noda said at a news conference in Tokyo today. “It’s appropriate for Japan to make a contribution as a leading nation to increase trust in the deal.
We want to buy more than 20 percent.”
The euro gained against the yen as the statements of support showed that the country with the world’s second-largest foreign-exchange reserves, after China, may help stem the risk of the crisis spreading. Portugal’s borrowing costs jumped last week as concern deepened that nation may be unable to avoid tapping the European Union’s rescue fund.
“This signals that the world is coming together” to save Europe, said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “But it’s unlikely the euro will maintain its current strength. It’s unclear whether the market will be able absorb all the bonds being issued by the problematic euro-zone nations.”
China has also voiced support for Europe, with Vice Premier Li Keqiang last week expressing confidence in Spain’s financial markets and pledging more purchases of that country’s debt.

Irish Bailout

The euro climbed to 107.58 yen as of 5:22 p.m. in Tokyo from 107.12 yen in New York yesterday, when it touched 106.83 yen, the lowest level since Sept. 14. The single currency traded at $1.2944 from $1.2951.
Japan will use its foreign-exchange reserves to buy more than a fifth of bonds to be issued later in January by the European Financial Stability Facility, Noda said. Japan’s reserves total $1.096 trillion, the government said today. That compared with China’s $2.85 trillion last quarter, according to figures reported by country’s central bank today.
The facility, overseen by euro-area governments, plans to raise up to 16.5 billion euros this year and 10 billion euros in
2012 to help finance the Irish bailout, the European Commission said last month. It plans to issue between 3 billion to 5 billion euro’s worth of the AAA-rated bonds later this month, meaning Japan may spend more than 1 billion euros.

Shifting Reserves

“I think we cannot rule out the possibility that the Japanese government” may need to shift part of its reserves to euros from U.S. dollars to buy the bonds, Tohru Sasaki, head of Japan rates and foreign exchange research at JPMorgan Chase & Co.
in Tokyo, said in a note to clients today.
The European Commission said last month that Europe’s financial aid funds for distressed governments will sell bonds to raise as much as 34.1 billion euros ($44 billion) for Ireland in 2011 and 14.9 billion euros in 2012.
The two funds -- the European Financial Stabilization Mechanism and the European Financial Stability Facility --will sell a total of seven to eight benchmark bonds, each worth 3 billion euros to 5 billion euros in 2011, the commission said in a statement in Brussels.
Investors in Asia were allocated almost a quarter of the 5 billion euros in bonds sold last week by the European Union when it began raising funds for the aid package for Ireland.

Stabilizing the System

Asian buyers accounted for 21.5 percent of the five-year securities sold on Jan. 5 by the European Financial Stabilization Mechanism, the commission said. That compares with Asia’s 4 percent average for EU bond sales since December 2008, the commission said on Jan. 6.
“Japan’s finally contributing to the stabilization of the global financial system,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo. “This is good news for the euro and it’s good news for the global financial system. Since Japan has a current-account surplus, in some ways it has a responsibility to help those with a capital shortage.”
The nation’s current-account surplus, which tracks the flow of goods, services and investment income between Japan and its trading partners, came to 1.436 trillion yen in October.
Portugal’s six-month borrowing cost jumped to 3.686 percent at a bill sale last week, up from 2.045 percent in September.
The country plans to borrow as much as 1.25 billion euros tomorrow by issuing debt repayable in October 2014 and June 2020, the nation’s debt agency said Jan. 6.
Noda didn’t mention Portugal at today’s news conference.

I guess this answers our question of who will be long-term holders of EFSF bonds. Why Japan would want to help China in their financial interests I have no clue? Hence, this may be a simpler way for Japan to sell Yen into the market without making a ton of noise. I cannot believe the Japanese government would willing help the Chinese protect their investments unless the trade rewarded the former.

NatGasTrader wrote:

I guess this answers our question of who will be long-term holders of EFSF bonds. Why Japan would want to help China in their financial interests I have no clue? Hence, this may be a simpler way for Japan to sell Yen into the market without making a ton of noise. I cannot believe the Japanese government would willing help the Chinese protect their investments unless the trade rewarded the former.

I think they merely invest and do a carry trade : invest cheap JPY in bonds with a good yield for a limited risk of default of countries they can support. It's sales time on the EUR!