Japan on Tuesday threw its support behind Europe’s bailout efforts, saying it will take a major stake in a bond offering for Ireland later this month by one of the special funds set up in the wake of the euro-zone sovereign debt crisis.
The government plans to buy more than 20% of a bond offering by the European Financial Stability Facility, expected some time this month, Finance Minister Yoshihiko Noda said at a press conference. The EUR440 billion fund was set up in June 2010 to help finance bailout efforts.
But where exactly is Japan getting the money from to buy these bonds? Japan’s been running big deficits for years and has debt of 201 percent of GDP, much larger than those European countries. But Japan pays almost nothing in interest rates on its own debt and is buying higher yielding bonds, profiting from the spread.
From a more macro viewpoint, Japan is monetizing the Euro debt just as the Fed is monetizing the US debt. But the difference is huge. These Euro countries are much closer to defaulting than the United States is and the spread between short-term Japanese rates and long-term Euro rates is much larger than the spread between short- and long-term rates in the US. Though Japan’s purchase is “only” 88 billion Euros compared to the Fed’s $600 billion in QE2 alone, Japan has a smaller economy and is taking a much larger risk.
The Yen and Nikkei index fell after the news. Japan should worry about its own fiscal and economic situation before trying (and likely failing) to help others.