Japan Buys More of Euro Bailot Bond - Article Example

Unlike Japan, other countries are not inclined to buy the European bonds because of the increasing debt problems which confront Europe. Even China which bought the bonds previously has not shown any intention of purchasing additional bonds. The financial crisis in Europe has made the yen stronger, making Japanese products less competitive than other products in the world. Because of this, the Japanese government has intervened in the currency market to weaken the yen, which was opposed by the European countries.

It is not clear though whether this opposition by European countries triggered the reduction in the purchase by Japan of the EFSF bonds. The Japanese Finance Ministry defends its position by saying that the reduction in the purchase is based on the euro “liquidity” in its reserves and the conditions of the EFSF securities (Nakamichi , par 10). As a background information, the European Financial Stability Fund was set up in May 2010 with $625M. It was set up “to bail out Greece to keep the turmoil caused by its debt from spreading to the euro-zone’s weaker members” (The New York Times , par 1). . This article shows the importance of rescuing the European countries.

Even if Japan is also beset with the problem of reconstruction after the devastating earthquake and tsunami last March, it still purchased the European bonds because it is aware that a recession in Europe will have a domino effect. Once European demand falls, the American, Japanese and Chinese economies will be adversely affected. Japan realizes that if the market confidence on the euro falls, there will be financial and trade disruptions. This scenario will lead to another global recession which the Japanese government would not like because their economy is export-driven.

Since Japan has excess foreign reserves, the Finance Ministry decided on purchasing the Euro bonds to help the European economy. Next to China, Japan is known to have the world’s second-largest foreign-exchange reserves. The move of Japan to buy the Euro bailout bond is very commendable because one sees the concern of Japan to avert a worldwide crisis. Japan’s move means that they want to do their share in stabilizing the global financial system. The purchase of Euro bonds by Japan will help sustain the euro which has declined versus the yen.

Hopefully, with Japan buying more Euro bonds, other countries will trust the deal more and purchase the bonds too to help Europe get out of the crisis. It will boost confidence in the EFSF further. Regarding Japan’s intervention to weaken their currency, one sees this as a move to help the country’s exporters. Having a strong yen makes Japanese goods more expensive for foreign buyers and would result in a decline in profit margins for the exporters. However, one does not see this as an effective way to improve its