Japan will buy bonds issued by the European Stability Mechanism to help weaken the yen, Finance Minister Taro Aso said.

The bond transactions will be funded by the country’s foreign exchange reserves, Aso told reporters Tuesday in Tokyo. The nation hasn’t decided on the purchase amount, he said.

Buying ESM bonds may help Prime Minister Shinzo Abe push down the yen while avoiding criticism of his currency policies from trading partners such as the U.S. and South Korea.

“The Europeans would be happy to see Japan buy ESM bonds, so Japan can avoid criticism from abroad and at the same time achieve its objective,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former central bank official.

The yen pared gains after Aso’s comments, falling to as low as 87.83 per dollar. As of 11:45 a.m. in Tokyo, the currency was at 87.65.

The U.S. criticized Japan for undertaking unilateral sales of the yen in 2011, after Group of Seven economies jointly intervened to weaken the currency in the aftermath of the record earthquake and tsunami that year.

“Rather than reacting to domestic ‘strong yen’ concerns by intervening to try to influence the exchange rate, Japan should take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy,” the Treasury Department said in a report in December 2011.

Abe’s Liberal Democratic Party faces the task of reviving growth after the economy contracted in the second and third quarters of last year, meeting the textbook definition of a recession. The nation’s industrial output tumbled more than forecast in November to the lowest level since the aftermath of last year’s record quake.

The ESM replaces the European Financial Stability Facility, a temporary mechanism whose bonds Japan purchased. The two funds will run in parallel until the EFSF is phased out in mid-2013. 

(Bloomberg)