Abe aids Fed as Japan seen buying $558 billion foreign debt

Fund Details

Abe said yesterday he wants someone “who can push through bold monetary policy” as the next governor of the Bank of Japan when Masaaki Shirakawa steps down in April. He has demanded the central bank double its inflation target to 2% and engage in unlimited easing till the goal is met.

Abe’s LDP, which swept to power in elections last month, has proposed establishing a fund run by the Bank of Japan, the Ministry of Finance and private investors to buy foreign bonds. He announced Jan. 11 a 10.3 trillion yen stimulus plan including about 3.8 trillion yen for disaster prevention and reconstruction, aimed at boosting gross domestic product by about 2 percentage points and creating about 600,000 jobs.

‘Bazooka Strategy’

The election handed the LDP a political mandate to follow through on its bond-purchase plan, George Goncalves, the head of interest-rate strategy at Nomura Securities International, one of 21 primary dealers that trade with the Fed, said in a Jan. 8 telephone interview from New York. “It’s a quantum leap from doing central bank easing in local markets to foreign markets.”

Details of the bond fund weren’t announced. It might be targeted at a variety of assets including Treasuries, though the whole amount may not even be deployed, according to Yunosuke Ikeda, the head of foreign-exchange strategy at Nomura in Tokyo.

“It’s the bazooka strategy,” Tokyo-based Ikeda said in a telephone interview on Jan. 10. “In order to have an impact on the dollar-yen market, the size needs to be very big.”

The yen may weaken to about 95 per dollar, Iwata, the president of the Japan Center for Economic Research, said at a forum in Tokyo on Jan. 11. The currency traded at 89.23 against its U.S. counterpart, having earlier fallen to 89.67, a level not seen since June 2010.

Buying Treasuries

In an October report, Iwata said that a 50 trillion yen fund would enable the BOJ to purchase foreign bonds to rein in the yen.

The fund could be twice that size or more as “there’s no upper limit,” said Masaaki Kanno, the chief Japan economist for JPMorgan and a former BOJ official. Abe can hold off on unveiling a large plan now until the next time the currency starts to appreciate, Kanno said by telephone Jan. 11.

Whatever the foreign bond fund’s amount, more than half will probably be funneled into Treasuries because they are the most easily-traded securities, Yoshiyuki Suzuki, the head of fixed-income in Tokyo at Fukoku Mutual Life Insurance Co., which has about $64.8 billion in assets, said on Jan. 8.

Tradable Treasury debt amounted to $11 trillion at the end of 2012, with weekly trading volume in the securities among 21 primary dealers averaging $521.4 billion, Fed data show.

Japanese Finance Minister Taro Aso said last week that his nation will buy bonds issued by the European Stability Mechanism to weaken the yen. The nation hasn’t decided on the amount, he said.

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