UPDATE 2-Japan finmin says will buy ESM bonds to help euro zone

Tue Jan 8, 2013 3:33am EST

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By Tetsushi Kajimoto

TOKYO, Jan 8 (Reuters) - Finance Minister Taro Aso said on Tuesday that Japan will purchase bonds issued by the euro zone's permanent bailout fund to help foster financial stability in that region.

Aso, speaking to reporters after a cabinet meeting, said the European Stability Mechanism (ESM) plans to issue securities later on Tuesday for the first time since it was launched last October.

"Stability in Europe's financial situation helps stabilise currencies including the yen," Aso said.

"From this standpoint and based on Europe's further efforts on financial stability, Japan will purchase a portion of ESM bonds continuously by utilising foreign reserves."

Aso's remarks prompted a jump in the euro to an intraday high of 115.25 yen from around 114.60 yen, though some market players said it was unclear whether Japan's plans to buy ESM bonds would have any direct impact on the yen.

A finance ministry official said the ESM will issue three-month bills totalling 2 billion euro ($2.6 billion) later on Tuesday and that Japan will decide whether to buy some of the first debt issue with euro from its foreign reserves after examining the issuance terms.

Japan will tap euro liquidity in the country's foreign reserves for ESM bond purchases, meaning that it won't change the currency makeup of its $1.27 trillion reserves -- the world's second largest after China's -- most of which is believed to be in dollars.

Japanese authorities do not give breakdowns of its foreign reserves.

Japan has so far bought about 7 billion euros worth of bonds issued by the euro zone's temporary rescue fund, roughly 6.7 percent of rescue bonds on issue as at the end of last year.

Japan has been considering buying bonds to be issued by the ESM, which replaces the temporary European Financial Stability Facility (EFSF), to help resolve Europe's debt crisis and improve Japan's management of foreign reserves.

The ESM bonds will rank equally with other euro zone securities held by Japan.

The ESM is designed to lend to distressed euro zone sovereigns in return for strict fiscal and structural reforms that aim to put over-indebted economies back on track.

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