Japan crisis prompts first joint currency intervention since 2000 amid threat to global recovery
The US, Europe, Japan and the UK are jointly intervening in currency markets for the first time since 2000, on fears a crippled Japanese economy, on top of the political upheaval in the Middle East, could combine to derail the global recovery.
The news of the intervention came very early this morning after a hastily assembled telephone conference of finance ministers and central bankers from the Group of Seven Industralised nations.
Currency traders in Tokyo and Singapore immediately began selling yen, which had surged to a record high against the dollar in the days after the earthquake.
The dollar rose to 81.82 yen after the intervention announcement. It had traded at 78.97 yen on Thursday afternoon after earlier hitting 76.53 yen — an all time low for the dollar and a record high for the yen. Britain said on Friday that the Bank of England had been selling yen as part of the co-ordinated G7 action.
Given the importance of major exporters such as Sony, Honda and Toyota to the Japanese economy, there was a concern that a stronger currency will inflict yet more damage on the country's economy.
The Nikkei 225 took comfort from the decision, rising 2.7pc, in a moved mirrored across Asian stock markets and in London where the FTSE 100 opened up 0.5pc.
It caps a turbulent week that saw the Nikkei lose 16pc in the first two days in volatile trading after a massive earthquake and tsunami last Friday wiped out much of Japan's industrial northeast and triggered a nuclear crisis.
The Nikkei has fallen 11.7pc since the earthquake struck, and this week alone is down 10.2pc.
The surprise intervention - most in financial markets had expected Japan to act alone - underlines the threat that nations now see from Japan, the world's third largest economy.
"They felt the necessity to do something collectively," said Masafumi Yamamoto, a currency analyst at Barclays Capital in Tokyo. "The disaster itself clearly had a very negative impact on the economy but the movement of the yen was making it worse."
The decision came just hours after the United Nations authorised military action against Libya, a move that will further complicate what's likely to be a frantic day across financial markets.
"Equities are likely to stage a relief rally on global cooperation to 'stabilize' Libya and Japan," analysts at DBS Bank in Singapore said in a report.
The finance minsisters will also be hoping both to arrest a wave of risk aversion that's gripped the markets since the earthquake struck, as well as to temper the sharp moves in both currency and, ultimately, equity markets.
"In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of Japanese authorities," we will intervene, the G7 countries said in a statement.
Yoshihoko Noda, Japan's finance minister, told reporters that the size of the intervention will be revealed in two months.
The Bank of England, the European Central Bank, the Federal Reserve and the Bank of Canada have all agreed to sell yen as their respective markets open today. Analysts estimated that the intervention could be as high as 750bn yen.
The strength of the yen since the earthquake struck a week ago appears counter-intuitive, but Mr Yamamoto of Barclays said that the Japanese currency has historically served as a safe haven for investors during a crisis, even one in the country.
He added that some speculators will have been buying yen in the hope that Japanese insurance companies would have to liquidate foreign investments in order to bring yen home to help pay for repairing the country.
In an effort to calm investors, Japan’s biggest insurance companies, which are big owners of America debt, yesterday issued strong denials that they were preparing a sell-off of US Treasury bonds.
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