UPDATE 1-Japan eyes 1.5 trln yen swap with Indonesia-sources

*Japan likely to extend FX swaps to avoid financial turmoil

*FX swap could coincide with talks on Indonesian Samurai bond

By Stanley White

TOKYO, July 6 (Reuters) - Japan is likely to agree a 1.5 trillion yen ($15.6 billion) currency swap with Indonesia in coming days to bolster the South East Asian country's defences against financial turmoil, sources with knowledge of the matter said on Monday.

Indonesian Finance Minister Sri Mulyani Indrawati is also expected to discuss a possible issuance of yen-denominated bonds while in Tokyo this week, an Indonesian finance ministry source told Reuters last week. The bonds, combined with a currency swap agreement, could help support investor confidence as Indonesia scrambles to fund a budget deficit due to fuel subsidies. "The timing of the currency swap could coincide with the Indonesian finance minister's visit," one source in Tokyo told Reuters on Monday.

"Talks are moving in that direction and an agreement could be reached in the next couple of days."

The sources in Tokyo declined to be named as some details of the currency swap are still undecided.

The yen swaps would be part of a scheme Japan announced in May to supply up to about 6 trillion yen to Asian nations in the event of a financial crisis, sources in Tokyo said. Japan already contributes $38.4 billion to a $120 billion multilateral swap pool for Asian countries known as the Chiang Mai Initiative. [ID:nSP468613]

Indonesia has said it plans to issue a samurai bond either this year or next and it is expected to raise the equivalent of $1.5 billion. The proceeds of the sale would be used to finance the country's budget deficit, which is about 2.5 percent of gross domestic product. Indonesia has already raised around 98 trillion rupiah of its 142.3 trillion rupiah gross debt issuance target. Samurai bonds are yen bonds issued in Japan by non-Japanese entities. [ID:nJAK534514]

The Philippines last month obtained a guarantee from the Japan Bank of International Cooperation for up to $1 billion for a samurai issue, but its finance secretary said last week it may issue global bonds if the samurai option turns out to be more expensive. [ID:nMAN519597] (Additional reporting by Charlotte Cooper; Editing by Hugh Lawson) (stanley.white@thomsonreuters.com; +81 3 6441 1984; Reuters Messaging: stanley.white.reuters.com@reuters.net))