G-7 Sells Yen in First Joint Intervention Since 2000 to Ease Japan Crisis
The Group of Seven jointly intervened 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, with Europe’s central banks following up in their markets, sending the currency down the most against the dollar since 2008. Japan’s Vice Finance Minister Fumihiko Igarashi said in an interview that he hoped the action would put a floor under the dollar-yen rate. G-7 finance chiefs said in a joint statement after a conference call they 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 of the world’s third-largest economy sinking into a recession. The Nikkei 225 Stock Average gained after the announcements, paring losses to 10 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.”
An official told reporters that today’s intervention totaled less than 2 trillion yen ($25 billion).
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 fell 3.1 percent to 81.36 at 12:36 p.m. in London, compared with the postwar high of 76.25 reached yesterday. It slid 4 percent versus the euro to 115.04. The Nikkei 225 (NKY) rose 2.7 percent at the close.
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. The BOJ sold 2 trillion yen in that effort, which was the first such move since 2004.
“We won’t manipulate it, but I hope that the yen goes back to where it was before the earthquake,” Igarashi said in an interview today in Tokyo. He added that the government at the same time wants to avert any “abrupt weakening” in the currency. Because the aftermath of the earthquake has “hurt the economy and fiscal situation, it won’t be a surprise” if bond yields go up and the yen weakens. “That’s naturally the biggest fear for the government.”
The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Bank of France, Germany’s Bundesbank and the Italian central bank all said they’re participating in the yen sales today. The central bank of China, which isn’t a G- 7 member and belongs to the larger Group of 20, didn’t respond to a request for comment on yen sales.
The People’s Bank of China separately today raised the nation’s banks’ required reserve ratios for the third time this year. Premier Wen Jiabao’s government is seeking to rein in inflation in the economy that last year surpassed Japan’s as the world’s second-largest.
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.
Treasury Secretary Timothy F. Geithner was instrumental in helping arrange the intervention after Finance Minister Yoshihiko Noda requested the operation, according to Igarashi. Geithner was Treasury undersecretary for international affairs during the 2000 intervention.
Japan’s officials had considered seeking a G-7 statement warning against currency volatility, and then monitoring the effect on the market, according to Igarashi. In the end, Noda decided to send a strong message to the market, he said.
This month’s catastrophe hit Japan just as it began emerging from a fourth-quarter economic contraction. With companies from Toyota Motor Corp. (7203) to electronics-maker Toshiba Corp. (6502) and the Sapporo Holdings Ltd. (2501) beer company suspending operations, economists predict gross domestic product may shrink in April to June.
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 from Toyota’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, has said she wants 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.
In the aftermath of the collapse of Lehman Brothers Holdings Inc., the G-7 pledged to mount “exceptional action” to unfreeze money markets. The Fed on Oct. 13, 2008, coordinated with counterparts to provide unlimited dollar funds.
The BOJ 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 BOJ have confirmed insurers aren’t selling their dollar assets.
BOJ Governor Masaaki 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.
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