Bloomberg News

Japan Pledges Liquidity in Case of Global Emergency Arising

May 11, 2012

A pedestrian walks past the Bank of Japan headquarters in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

A pedestrian walks past the Bank of Japan headquarters in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s central bank pledged to deploy its foreign-exchange assets as part of any international emergency response to turmoil in financial markets.

“Time may be necessary before international organizations and other relevant institutions are able to take necessary measures,” the Bank of Japan said in a statement in Tokyo today. The bank “would be prepared to provide foreign currency until international support is provided,” it said.

The bank revised its guidelines for reserve management to take account of “recent changes in international financial and capital market conditions.” In 2008, the BOJ participated in Federal Reserve swap lines designed to address a surge in demand for dollars in the aftermath Lehman Brothers Holdings Inc.’s collapse. Today, investors are monitoring for any signs of a Greek exit from the euro region that would roil markets anew.

“Whatever their intentions, today’s decision is likely to promote a risk-off mode among investors especially when there seems to be no real improvement in Greece,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. (JPM:US) in Tokyo and a former chief foreign-exchange dealer at the BOJ.

Yields on benchmark 30-year German government bonds fell to a record low of 2.201 percent as European trading began today, with investors piling into the securities of Europe’s largest economy as a haven. The MSCI Asia Pacific Index (MXAP) of stocks fell 1 percent, with the weekly drop the largest since November.

Reserves Size

Today’s guidelines apply to the BOJ’s foreign-currency assets, which totaled 5.05 trillion yen ($63 billion) as of the end of April, the central bank’s data show. The bulk of Japan’s $1.2 trillion in foreign-exchange reserves -- the world’s second-largest, after China’s -- are overseen by the Ministry of Finance, which hasn’t announced any change.

The central bank said that it’s prepared to provide emergency liquidity to Japanese financial institutions, while saying they “do not face any problems with their foreign currency funding” at the moment.

Europe’s crisis intensified this week, with Greece struggling to form a government after an election, and Spain taking control of its fourth-biggest bank.

Seeking Safety

Japan’s central bank will seek safer and more liquid currency assets because of increased volatility in financial markets, it also said today. The BOJ’s reserves will be made up of foreign government debt maturing in up to five years and deposits with central banks and other institutions abroad. BOJ data as of September showed more than 90 percent of its holdings were in bonds.

“There have been situations where the market liquidity of assets once considered as relatively safe has deteriorated, accompanied by, in some cases, increased credit risk,” the central bank said. There has been “a growing tendency for a financial shock in one corner of the world to spill over into other markets, and the speed of such spillovers has accelerated,” it said.

Today’s statement follows a push by some politicians for the central bank to seek greater returns on its holdings. Lawmakers from Japan’s upper house in July agreed to encourage the BOJ to reconsider its management of foreign assets after payments to the national treasury in the previous fiscal year were less than anticipated, hurt by a surging yen.

Euro Concern

The 17-nation euro area is on the verge of losing one of its members, with more than 50 percent of investors predicting an exit this year, according to a Bloomberg Global Poll published this week. As Greece faces political paralysis and voters balk at austerity, 57 percent of 1,253 investors, analysts and traders who are Bloomberg subscribers said at least one country will abandon the euro by year-end.

Global organizations such as the International Monetary Fund can take weeks or months to decide on rescue measures as discussions are held on the conditions attached to the packages and approvals are obtained from member nations.

“The BOJ is showing it has a contingency plan in case the Greece situation gets much worse rapidly,” said Atsushi Ito, a senior rate strategist in Tokyo at UBS AG. “I don’t think this will have a big impact on the market,” he said, as the central bank’s holdings aren’t large enough.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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