The Group of Seven agreed to jointly intervene in the foreign exchange market for the first time in more than a decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake.
Japan began the effort, sending the currency down 3.4 percent against the dollar at 1:36 p.m. in Tokyo. Each of the G-7 members will sell yen as their markets open, Japan’s Finance Minister Yoshihiko Noda told reporters in Tokyo today. The G-7 said in a joint statement after a conference call of its finance ministers and central bank chiefs that it will “provide any needed cooperation” with Japan.
Japan’s central bank repeated its pledge to pursue “powerful monetary easing” as policy makers sought to reduce the threat the world’s third-largest economy sinks into a recession. The Nikkei 225 (NKY) Stock Average gained after the announcements, paring losses to 12 percent since the quake and ensuing tsunami killed thousands and led to rolling blackouts and radiation leaks at a nuclear plant.
“It will be supportive for the economy if they can manage to stabilize the yen,” said Thomas Harr, Singapore- based head of Asian foreign-exchange strategy at Standard Chartered Plc. “You will have better chance of succeeding when you have the joint intervention rather than just Bank of Japan.”
The G-7 said in its statement that “in response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities” it will intervene in the currency market today. “We will monitor exchange markets closely and will cooperate as appropriate,” the statement said.
Against the dollar, the yen was at 81.70, while it slid 3.8 percent versus the euro to 114.93. The Nikkei 225 rose 2.8 percent. Japan’s intervention today was its first since September, when it acted on its own after the yen had climbed to 82.88, the strongest at that time since 1995.
“Unilateral intervention isn’t usually very long lasting in its effectiveness but if we have coordinated action that certainly should help to tie down the yen,” said Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc. “With all major central banks coordinating their action there’s a lot of firepower at their disposal.”
Risk to Economy
A stronger exchange rate threatened to hamper Japan’s recovery from its worst postwar crisis by curtailing the earnings of its exporters. Every one yen the currency appreciates against the dollar erodes about 30 billion yen ($367 million) from Toyota Motor Co.’s earnings, according to the company. Honda Motor Co., which produces over 70 percent of its vehicles outside Japan, loses 17 billion yen for each one yen the currency strengthens against the dollar.
“Today’s operation obviously improves our forecast for the Japanese economy in the near-term,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a note. “The key question is whether they can make the dollar’s new level stick” against the yen, he wrote.
French Finance Minister Christine Lagarde, whose nation chairs the group, said two days ago she wanted to hold G-7 talks on the financial response to the catastrophe, including possibly buying Japanese bonds. The G-7 is made up of the U.S., Germany, France, Canada, Italy, the U.K. and Japan.
G-7 members hadn’t entered the market together since September 2000, when they sought to buoy the euro as it tumbled in its second year of existence. The U.S. Treasury’s participation was its first since September 2000, ending the longest period of American inaction in foreign-exchange markets since at least 1973, according to department figures.
In 2000, current Treasury Secretary Timothy F. Geithner was then the department’s undersecretary for international affairs.
In the aftermath of the collapse of Lehman Brothers Holdings Inc., the G-7 pledged to mount “exceptional action” to unfreeze money markets. The Federal Reserve on Oct. 13, 2008, coordinated with counterparts to provide unlimited dollar funds.
The Bank of Japan has been pouring cash into the financial system to stabilize money markets and on March 14 doubled an asset-purchase fund to 10 trillion yen, pledging to step up purchases of securities including government debt, exchange-traded funds and real-estate investment trusts.
Noda and Economic and Fiscal Policy Minister Kaoru Yosano sought to quell speculation driving the yen higher yesterday. Noda said markets were nervous and Yosano said there was no basis for an argument that the nation’s insurance companies were repatriating foreign assets to pay for earthquake damage.
“The speculation was that Japanese life and casualty insurers will repatriate dollar-denominated assets to secure funds in the wake of the earthquake,” Yosano told reporters in Tokyo yesterday. “But they have ample cash, deposits and other liquid assets,” he said, adding that the Financial Services Agency and Bank of Japan have confirmed insurers aren’t selling their dollar assets.
Shirakawa said on March 13 that he was prepared to unleash “massive” liquidity to secure stability, a commitment followed up the next day with a record 15 trillion yen in one-day cash, with injections diminishing since then.