Japan buys more EFSF bonds to keep eurozone afloat

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Japan’s Ministry of Finance has confirmed that it has bought 10% of the latest bonds issued by the eurozone’s rescue fund.

The ministry said it purchased 300m euros ($413m; 257m) of bonds issued by the European Financial Stability Facility (EFSF).

Japan’s purchase is the smallest amount it has bought so far from the fund.

Eurozone leaders have been seeking increased investment in the fund to help finance debt-laden economies.

Last month, they agreed to increase the size of the bailout fund to 1trillion euros.

Japan has bought bonds from the EFSF on three previous occasions taking its holdings to 2.975bn euros.

CURRENCY MARKET INTERVENTION

According to the Japanese Ministry of Finance, the first time that the EFSF raised money, Japan bought 1.25bn euros, or 20.5%, of the total bonds issued.

That was followed by a purchase of 1.1bn euros, or 22%, in the second round and 550m euros, or 17%, of bonds issued in the third.

Finance Minister Jun Azumi has so far spoken against the idea of selling yen for euros to pay for EFSF debt purchases, as he said such moves would amount to currency market intervention.

Analysts said the lower level of purchase in the latest round has been driven mostly by the state of Japan’s foreign exchange holdings.

“Japan is extremely dollar heavy in their reserves,” Naomi Fink of Jefferies told the BBC, adding that unless Japan sold US dollars, the amount of money it has to invest in euros is limited.

Fink explained that at present Japan is committed to holding its dollar reserves and so far authorities had not shown an inclination to swap them for euros.

“That would be a slight shift in policy and would also add some cross-currency risk,” she added.

THE YEN FACTOR

Japan, the world’s third-largest economy, has voiced its support for a rescue plan for the eurozone’s troubled economies, not least because the region is one of the biggest markets for Japanese exports.

At the same time, stability in the eurozone is also key for Japan’s currency policies.

The recent uncertainty about the eurozone debt crisis saw many investors dump their euro holdings and buy the yen and yen-denominated assets, which are being considered by many as safe-haven assets.

That led to a surge in the yen’s value taking it to post-world war highs against the US Dollar. A strong yen harms Japan’s export-dependent economy making goods more expensive to foreign buyers and reducing profit margins for exporters.

BBC’s Tokyo correspondent said that stability in the eurozone is “very much in Japan’s national interest”.

“This (the money spent on the latest bond buying by Japan) is really quite small compared to the amount that Japan has been spending on intervening in the currency markets,” he said.

Authorities pumped in 4.5tn yen ($57.6bn; 36bn) in an attempt to weaken the yen in August.

That was followed by another intervention last month believed to be in the range of as much as 8tn yen.

“Perhaps it’s cheaper to sort out the problem at the other end, to help Europe go back to stability,” BBC correspondent added.

EUROZONE IN CHAOS

While the sale of all the three billion euros in debt will be crucial to the EFSF – the fund set up to provide support to struggling European economies such as Ireland and Portugal – was met with a weak response.

There are concerns that the debt crisis in Greece and now Italy could see either of them default, which could lead to chaos in the eurozone and possibly another global recession.

Amid fears over Italy’s ability to contain a huge debt mountain, the yield on the country’s 10-year bonds hit a record high 6.676 percent on Monday.

Tokyo fears that any further deterioration in the European crisis could cause serious problems for Japan’s export-dependent economy as it gradually recovers from the impact of the March 11 earthquake and tsunami.

Japanese Prime Minister Yoshihiko Noda warned last week that the eurozone debt crisis could trigger a chain reaction throughout the world.

“In Europe, we need to avoid a chain reaction triggered by the budgetary problems in certain countries,” Noda said Thursday at a business round table before the G20 summit in Cannes,France.

“You can’t let the financial sector collapse,” he said. “You can’t let the real economy suffer excessively.”

The government last week launched its fourth yen-selling intervention in just over a year as it looked to weaken a unit whose recent strength has threatened the nation’s recovery from the March disasters.

China, which had previously bought EFSF bonds, has so far remained noncommittal about future purchases.

Sources: BBC, AFP

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