Japan to buy euro zone bonds, but markets expect little impact
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Japan said Tuesday it was ready to buy euro zone bonds in a mark of support for the struggling trading bloc. Analysts say Tokyo could do with some goodwill after its market intervention to curb the yen drew fire from its trading partners.
REUTERS - Japan pledged to buy euro zone bonds this month in a show of support for Europe's struggle with a smouldering debt crisis, but market players doubted the gesture would offer the euro much relief.
Finance Minister Yoshihiko Noda told reporters after a cabinet meeting on Tuesday that Tokyo was considering buying about 20 percent of euro zone bonds to be jointly issued later this month to raise funds to support Ireland. Japan would use its existing euro reserves to pay for the debt, Noda said.
Japan's offer comes days after China reaffirmed its commitment to buy Spanish debt and analysts said it reflected both Tokyo's concern about the impact of the crisis on its export-reliant economy and an effort to reassert itself on the global stage.
"I think it's appropriate for Japan to purchase a certain amount of bonds to boost confidence in the EFSF (European Financial Stability Facility) and make a contribution as a major country," Noda said.
The European Union set up the 440 billion euro fund as a safety net for heavily indebted euro zone nations, but it failed to deter investors from betting on more bailouts.
A finance ministry source told Reuters that Japan would continue to buy bonds issued under the scheme as part of its commitment as a Group of Seven nation to stabilising the world economy and containing the debt crisis. The official declined to be named because he was not authorised to speak to the media.
Tokyo's pledge also follows reports that the European Central Bank was buying Portuguese bonds on Monday, after speculation that Portugal would soon follow Greece and Ireland in seeking an international bailout pushed the euro to four-month lows.
Japan's announcement lifted the single currency as far as $1.2992 on trading platform EBS from around $1.2925.
But it pulled back later when it became clear that Tokyo would use its existing euro reserves to buy the bonds and analysts expected the impact of Japan's gesture to be short-lived.
"I don't think these comments change the backdrop for the euro at all," said Todd Elmer, currency strategist for Citi in Singapore.
"Despite the fact that we're seeing this groundswell of international support, it doesn't really change or address the underlying problem and that's not going to change until the European authorities themselves come up with a more comprehensive solution."
Analysts said that besides concern that an escalating debt rout in Europe could thwart Japan's own recovery, Tokyo might also be acting to preserve its standing in global economic diplomacy after Beijing seized the initiative.
China's declared support for Spain -- euro zone's fourth-largest economy seen most at risk of contagion from Portugal's troubles -- follows Beijing's pledges last year to
buy bonds issued by Greece, the first euro zone nation to need a rescue.
"With China pledging to buy euro zone bonds and its currency-based diplomacy increasingly prominent, Japan appears to be trying to follow suit to secure European support in possible future negotiations, either with the United States or China," said Yasunari Ueno, chief market economist at Mizuho Securities.
Analysts also say that just like Beijing, at odds with Europe and the United States over its yuan policy, Tokyo could do with some goodwill capital after its market intervention to curb the yen drew fire from its trading partners.
Data released on Tuesday confirmed that Japan spent more than $25 billion to halt the yen's rise in September out of its reserve stockpile that stood at $1.1 trillion at the end
of last year -- second only to China's $2.85 trillion.
As part of its 80 billion euro rescue plan for Ireland agreed in December, the EU intends to launch four or five benchmark bonds this year, aiming for 3 billion to 5 billion euros ($3.9-6.5 billion) for each transaction.
A senior EU source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek a similar EU-IMF rescue package that could be worth 50-100 billion euros.