Japan bought billions of US dollars to restrain a soaring yen yesterday, kicking off joint market intervention by the world’s richest nations to calm global markets made nervous by the threat of a meltdown at a nuclear power plant near Tokyo.
After a week of panicky trading, the US dollar surged a full ￥2 to as much as ￥81.83, leaving behind a record low of ￥76.25 hit on Thursday as the Bank of Japan (BOJ) stepped into the market.
Traders and media reports estimated it bought more than US$25 billion. Now the likes of the US Federal Reserve and the European Central Bank are set to join the action in the G7’s first combined intervention in a decade.
“It’s going to have a very huge resonating effect on the market,” said Kathy Lien, director of currency research at GFT in New York. “Because the only type of intervention that actually works is coordinated intervention and it shows the solidarity of all central banks in terms of the severity of the situation in Japan.”
Japan’s Nikkei share index climbed to close at 3 percent, recouping some of the week’s stinging losses as Japan reeled from an earthquake, tsunami and the nuclear power plant crisis. The market’s losses for the week are 10 percent.
The G7 announced its intent to jointly intervene after a short teleconference early yesterday in a demonstration of solidarity with disaster-hit Japan.
The decision came as a surprise to many because Tokyo had indicated it was looking for moral support for its attempts to assuage markets rather than joint action.
The last joint intervention was a decade ago when the rich nations moved to turn a slumping euro following its 1999 launch.
Japanese Minister of Finance Yoshihiko Noda said the BOJ had begun to sell yen at 12am GMT and other G7 central banks would intervene as their markets opened.
A source told Reuters the BOJ would also leave the yen it sold in the banking system rather than mopping it up, thus adding to the vast amount of liquidity it had already provided to support its domestic markets. The BOJ injected another ￥4 trillion (US$49 billion) of emergency funds into the short-term money markets yesterday.
Central banks will often issue bonds to mop up any extra cash in the economy that results from currency intervention for fear that the additional liquidity could fuel inflation.
On Thursday, the yen had soared to a record high of ￥76.25 per US dollar, eclipsing its historical peak of ￥79.75 hit in the aftermath of the Kobe earthquake.
The yen jumped amid speculation Japanese firms would repatriate some of their huge foreign assets to help meet insurance claims and pay for reconstruction.
G7 financial leaders may be worried that a surge in yen repatriation could unsettle global markets, creating a crisis of confidence that spreads from Asia to Europe and the US.
“As we long have stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” the G7 said in a statement.
On Thursday, US President Barack Obama said the US would do all it can to help Japan recover while playing down fears a drifting cloud of radiation could reach the US West Coast.
The G7 deal and Obama’s statement suggest a heightened degree of concern among top policymakers at the threat posed by the disaster at a time when the global economy is still recovering from its worst downturn in about 80 years.
Europe is wrestling with a debt crisis and the US Fed is buying up domestic government debt to safeguard a stop-start economic bounce back in the US.
“I think the world economy is going to go right down and it has happened at a time when financial markets are still fragile,” said a G7 central banker who declined to be named.
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