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Canada and its allies in the Group of Seven nations are taking a stand against the currency traders who pushed the yen to a record high this week, a destabilizing surge that risked hampering Japan’s efforts to recover from last week’s magnitude-9.0 earthquake and tsunami.
In a move that took many investors by surprise, finance ministers and central bank governors from the G7 countries agreed during a conference call Thursday evening to mount their first joint intervention in foreign-exchange markets in more than a decade.
“We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed co-operation and our confidence in the resilience of the Japanese economy and financial sector,” G7 finance ministers and central bankers said in a statement. “As we have long stated, excessive volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”
The G7 includes the United States, Japan, Germany, Britain, France, Italy and Canada. The group last participated in a joint intervention in 2001 to prop up the euro, which was two years old at the time and struggling to gain the confidence of investors. The rare call to arms suggests international resolve to protect the world’s third-largest economy at a time of need, and to keep Japan’s struggles from triggering a crisis in global financial markets.
“This is a surprise,” said Mark Chandler, a fixed-income analyst at Royal Bank of Canada in Toronto. “The odds were that the G7 would wait for clearer signals. There is obvious concern there.”
G7 officials kept details of their plan to a minimum to gain the advantage of surprise on traders who have been bidding up the yen in anticipation of Japanese cashing in billions of dollars in overseas investments to pay for reconstruction.
The statement said only that “in response to recent movements in the exchange rate of the yen associated with the tragic events in Japan,” the authorities in the U.S., Britain, and Canada and at the European Central Bank will join Japan in a “concerted intervention in exchange markets” on March 18.
Japan, whose central bank flooded the market with cash on Monday to avoid a crisis of confidence in the financial system, asked for support, the statement said. Japanese Finance Minister Yoshihiko Noda told reporters after the conference call that each central bank would intervene as their respective markets open. The Bank of Japan led off at 9 a.m. Tokyo time, Noda said, according to Bloomberg News.
The yen had fallen 3.1 percent against its U.S. counterpart within a half an hour of the Bank of Japan’s foray into the market, according to Bloomberg, leaving the currency at about 81.4 to the dollar. Against the euro, the Japanese currency dropped 2.8 percent to 113.80. The Nikkei 225 Stock Average rose.
A stronger currency is a burden for Japan’s exporters at a time when the country’s economy can least afford it. The quake and ensuing tsunami killed thousands, and the destruction has disrupted production at companies such as Toyota Corp. and Sony Corp. The country remains on edge as authorities struggle to contain radiation leaks at a shattered nuclear plant.
Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York, said the Bank of Japan was buying U.S. dollars in “several waves.” The European Central Ban, the Bank of England, the U.S. Federal Reserve and the Bank of Canada likely will sell a portion of their holdings of yen to reduce to demand for the Japanese currency, and thus lowering the exchange rate.
Nordvig predicted the joint effort would keep the yen’s value above 80 to the dollar, at least for now. “This is a powerful statement,” Nordvig said in a note to clients.
Generally, central bankers are loath to intervene in foreign-exchange markets because they lack the firepower to fight thousands of hedge funds with billions at their disposal. However, most believe they have a better chance of reversing market sentiment when acting together.
The success of the effort will depend on how much money central banks are willing to commit, and their resolve to stick with it, analysts said. The G7’s task is to convince enough speculators that betting on a stronger yen in a losing proposition.
“Whether this is viable looking further ahead will partially depend on the size of intervention operations and the commitment of international partners to sustain them,” said Nordvig.