UPDATE 1-Japan to buy up to $10 bln Chinese govt bonds-Nikkei

Dec 20 (Reuters) - Japan will purchase Chinese government bonds to diversify its foreign exchange reserves and help boost the Chinese currency's standing, Japanese business daily the Nikkei said.

Japan's foreign exchange fund special account may buy up to 780 billion yen or $10 billion of yuan-denominated government bonds as part of a proposed bilateral currency and financial agreement, the financial newspaper added.

China already has Japanese government bonds as part of its foreign exchange reserves, it added.

Japan, which now holds most of its reserves in dollars, will also aid Chinese efforts to nurture an offshore market for yuan-denominated transactions, the daily added.

China issued 1.4 trillion yuan ($220.90 billion) worth of government bonds in 2009, up 55 percent from the previous year, the daily said.

Thailand and Nigeria already hold yuan-denominated government bonds, the Nikkei said.

The two countries will also set up a joint environmental investment fund with the participation of the Japan Bank for International Cooperation and Japanese private-sector companies, it added.

The two countries may sign the agreement when their leaders meet for a summit on Sunday, the Nikkei said.