G-7 Sells Yen in First Joint Intervention in more than Decade

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 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 on 18 March. 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.

Japan Asked

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. “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 on 18 March 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.

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.

Lagarde Suggestion

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.

BOJ’s Action

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 on 17 March. 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 on 17 March. “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.