Japan has promised to buy European Union issued bonds to augment the European Financial Stability Fund (EFSF) in an apparent gesture to show confidence in the bloc’s single trading currency and contain the crisis from spreading to other countries.
Portugal Sovereign 10 year bond yield rose above the unsustainable 7 percent level on Monday prompting the European Central Bank to intervene and buy the country’s bonds.
Japan’s latest move resembles its earlier pledge to lend the International Monetary Fund (IMF) $100 billion to help emerging and the eurozone countries. However, this is the first instance of Japan buying EFSF funds specifically to stabilise the EU region since the crisis broke out. China has already made a similar gesture and has promised to buy Spanish bonds.
Japan holds close to $1,036 billion in foreign reserves, mostly in short term US treasuries. However, Japan plans to buy at least 20 percent of Euro denominated bonds scheduled to be issued by the end of this month, ostensibly to help Ireland. The EFSF is slated to launch bonds worth €5 billion on behalf of 17 member countries.
“To raise trust (in the EU) is appropriate for Japan as a leading nation to contribute by purchasing a percentage (of Euro bonds),” said Yoshihiko Noda, Japan’s Finance Minister to reporters.
Chris Scicluna of Daiwa Capital Markets, Europe said he expects a lot of investment from Asia as the continent holds a lot of foreign reserves. “It at least represents a positive token gesture for the eurozone and helps the mood music surrounding the issue”, he added.
EFSF bond purchase serves Japanese interest as well since a stronger Euro compared to the Yen helps exports. Also it saves Tokyo the trouble deciding which bond to buy in the troubled eurozone based on its exposure in individual member countries.
“Mr. Noda is saying ‘well we want to show solidarity’, but probably what they don’t want to do is be forced to buy bunds if they get very expensive, and don’t want to buy other (lower rated or junk) stuff just in case, so they might as well buy EFSF bonds instead”, said Christian Carrillo – rates strategist at Société Générale.