Japan, concerned that the sovereign debt crisis in Europe could destabilize the regional economy, is set to purchase South Korean government bonds to strengthen financial cooperation with its Asian neighbors.
The plan will likely be announced May 3 at a meeting in the Philippines of finance ministers from Japan, China and South Korea, sources said.
Japan has already decided to purchase Chinese government bonds denominated in yuan.
According to government sources, South Korea has given its approval to Japan to purchase government bonds denominated in won.
Although South Korean government bonds are freely traded on the market, Japan informed South Korea of its purchase plans as a matter of protocol because it will be buying them for the first time with its foreign reserves.
South Korea is believed to already own Japanese government bonds as part of its foreign reserves.
In March, Japan agreed with China to buy Chinese government bonds.
China has allowed Japan to buy $10.3 billion (835 billion yen) worth of bonds.
China has already allowed the South Korean central bank and a South Korean government-affiliated investment company to purchase Chinese government bonds denominated in yuan.
At a summit meeting in October, Japan and South Korea agreed to increase the amount of foreign currency either of the countries will lend to the other in the event of a currency crisis. The amount was raised from $13 billion to $70 billion.
The agreement came in response to a fall in the won’s value prompted by an outflow of funds from the South Korean financial markets due to the European debt crisis.
Japan, China and South Korea have been discussing plans to double the amount of loans available under the Chiang Mai Initiative, a regional currency swap agreement with ASEAN, to $240 billion.
(This article was written by Shohei Makiuchi and Keiko Yoshioka.)
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