Europe should boost the total firepower of its rescue fund and frontload its funding to send a positive signal to investors and international partners that it is determined to solve its debt crisis, Japanese officials said.
Japan has repeatedly expressed its willingness to help Europe contain its debt crisis, but has also stressed it wanted to see a convincing action plan before making any firm commitments.
"Japan, like other non-euro countries, is prepared to do something, but unless European countries take decisive action it is hard to make those steps effective," a senior Japanese government official said.
Lifting the combined size of the current bailout fund (EFSF) and the new permanent European Stability Mechanism (ESM) beyond the current 500 billion euros would be a major step and an encouraging signal.
"We expect European countries will review the combined ceiling of 500 billion euro of EFSF (European Financial Stability Fund) and ESM in a very positive manner," the official told Reuters.
European leaders agreed in Brussels earlier this month to accelerate the launch of the ESM by a year to mid-2012 with an effective lending capacity of 500 billion euros ($650 billion), but questions have arisen about the size and timing of contributions.
Japanese officials said that while bringing forward the launch of the fund was positive, a more ambitious ceiling might be needed given that Europe had little success in bringing in outside investors to boost the firepower of the EFSF fund.
"The leveraging of EFSF money by investors' money doesn't look like materializing very well. That's why they are frontloading the ESM and the review of the ceiling of 500 billion euro is very important," said the official, who declined to be named.
"European countries may think what they've already decided is a major step forward, but markets want Europe to act more decisively."
German Finance Minister Wolfgang Schaeuble signaled over the weekend that Europe's biggest economy and its main paymaster could boost its contribution to the fund and support its swift launch, although any decisions would have to be made in January.
Since the beginning of the crisis more than two years ago, European leaders have orchestrated bailouts of Greece, Ireland and Portugal, set up a eurozone rescue fund and earlier this month agreed to boost the International Monetary Fund's resources by 150 billion euros.
Still, throughout the crisis that has also shaken Italy and Spain, investors have repeatedly been left with the impression that whatever was agreed in Brussels was too little, too late.
Japan, the United States, Canada and others have voiced their frustration with Europe's piecemeal progress and repeatedly called for bold steps that would create effective "firewalls" around the eurozone's weaker, heavily indebted economies.
Another Japanese government official reiterated on Monday that Tokyo, which led an international effort to boost the IMF's coffers after the Lehman crisis, was open to contributing more but that its decision depended on Europe's actions.
Officials in Tokyo said markets needed to see both effective defenses in the form of funds sufficient enough to cover the crisis-hit nations' financing needs and commitments to fiscal discipline.
"Fiscal discipline is very important. Even if we provide firewalls we need fiscal discipline," the official said.
While Tokyo has repeatedly voiced concern about developments in Europe, its plans to buy Chinese government debt did not reflect lack of confidence in the euro or U.S. dollar assets, another official said.
He said the plans, discussed during Prime Minister Yoshihiko Noda's visit to Beijing, aimed at strengthening economic ties between the two nations rather than diversifying Japan's exchange reserves, mostly made up of dollar and euro assets.
"The idea is not to depart from the dollar or U.S. government bonds or the euro, so it should not be interpreted as diversification of our portfolio," the official said.
"I don't have any doubts about creditworthiness of the dollar or U.S. government bonds. The dollar will remain the most important currency for the foreseeable future."
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