Japan To Buy ESM Bonds Using FX Reserves To Help Weaken Yen (Bloomberg)

So Japan will ‘stabilize’ itself by monetizing European debt.

Now that makes perfect sense …

… if one belongs to those Keynesian lunatics.

You can’t make this stuff up!

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Japan to Buy ESM Bonds Using FX Reserves to Help Weaken Yen (Bloomberg, Jan 8, 2013):

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 temper criticism of Japan’s currency policies from trading partners such as the U.S. 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 falling to about 87.75 per dollar before trading at 87.42 as of 5:18 p.m. in Tokyo. Against the euro, the Japanese currency weakened to around 115.20 before trading at 114.60.

The ESM will hold its first debt auction later today, offering as much as 2 billion euros ($2.6 billion) of three- month bills.

‘Political Move’

Marshall Gittler, head of global FX strategy at IronFX Financial Services in Cyprus and a former yen strategist at Deutsche Bank AG in Tokyo, said he doesn’t think the plan will have a significant impact on the Japanese currency.

“This might be more of a political move to counter any criticism that the Europeans might have about any other steps that Japan might take to weaken the yen,” he said. “So watch out for the next shoe to drop.”

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.

Reviving Growth

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.

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 considers ESM bonds a major investment tool just like euro-denominated sovereign bonds” Aso said today.

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.

Japan held $1.27 trillion in foreign reserves as the end of November, according to finance ministry data.

1 thought on “Japan To Buy ESM Bonds Using FX Reserves To Help Weaken Yen (Bloomberg)”

  1. How does buying more debt help anyone? None of these nations are buying anything to contribute to growth, just debt. Debt leveraged out 1000:1. How can any sane person believe they will ever see their money back at such odds? It is insane.
    I guess the US is unhappy because the Japanese used to buy US treasuries, now they are buying Euro treasuries instead……..foreign investment here has slowed to a trickle because (thanks to our inept and corrupt leadership) we have lost all credibility. Now, all the other nations are playing the US game of selling endless debt, and we are losing. Japan used to be our #2 investor, behind China….but no longer.
    What happens when it is discovered for a fact there is nothing under any of the shells in these endless games? What currency will survive? How many will collapse?
    These are the real questions. Unfortunately, I don’t have the answers.


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