EFSF: Japan Buys 10% of Bailout Bonds

Japan helps the euro recover as the yen hits post-war highs

Japan helps the euro recover as the yen hits post-war highs

The Ministry of Finance for Japan has recently confirmed the country’s purchase of bonds from the eurozone’s bailout fund.

The Asian economic giant has purchased 10% of the bonds issued by the rescue fund, dubbed the European Financial Stability Fund.

Hit by uncertainty

Japan is speculated to have invested in the rescue fund because its own currency, the yen, has been hit hard by market volatility in the wake of the eurozone crisis. Even the uncertainty of whether Greece would get its next bailout tranche, and therefore whether their lenders would be paid, cost Japanese investors millions and rocked the economy.

At the same time, Japan’s purchase is among the smallest amount that it has so far bought from the EFSF. According to the Japanese Ministry of Finance, the first round of bailout fund fundraising saw Japan purchasing 1.25 billion euros, or 20.5% of the total bonds issued.

It has now made bond purchases from the eurozone bailout fund three times, giving Japan a total of 2.975 billion euros in holdings.

Analysts say that the most recent lower-level purchase took place is because of Japan’s foreign exhange holdings, which are dominated heavily by the dollar. The country is currently committed to holding its dollar reserves and will not pursue an equal holding in euros.

Post-war highs

Despite this, stability in the eurozone is imperative for the currency policies of Japan, the world’s third-largest economy.

Uncertainty in the single-currency bloc has led many investors to sell off their euro holdings in exchange for purchasing yen and yen-dominated assets in an effort to find a ‘safe haven’ from market volatility. This, in turn, led to a surge in the value of the yen, bringing it to new highs against the US Dollar.

For a strong, export-led economy such as Japan, increased valuation of currency is harmful as it makes domestic goods more expensive to foreign buyers. Profit margins are reduced for exporters, and economic growth is hampered.

Because of this, analysts say that the prosperity of the eurozone is very much in the interest of Japan, making the ‘small’ 300 million euro bonds purchase perplexing.

Japan pumped 4.5 trillion yen (£36 billion) into its own economy in August, in attempts to weaken the yen. This was followed by another monetary easing measure last month, speculated to be in the range of 8 trillion yen.

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