Is it me or do charts predict fundamental events?
G7 agrees joint intervention to restrain yen
By Wayne Cole Wayne Cole
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1 hr 58 mins ago
SYDNEY (Reuters) – The Group of Seven rich nations on
Friday agreed to join in rare concerted intervention to restrain a
run-away yen, hoping to calm global markets after a wild week of often
panic selling.
The U.S. dollar immediately surged over a full yen to 80.73 yen, leaving
behind a record low of 76.25 hit on Thursday. Japan's Nikkei share
index climbed 2.5 percent, recouping some of the week's stinging losses.
The G7 agreement to jointly intervene to sell yen came as a surprise to
many as sources had suggested they would only give Japan a green light
to go it alone.
Japan's Finance Minister Yoshihiko Noda said the Bank of Japan had begun
to sell yen at 12:00 a.m. GMT (8:00 p.m. EDT) and other central banks
from the G7 would intervene as their markets opened.
"This is the first coordinated intervention that we have seen since 2000
so 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."
On Thursday, the yen soared to a record high of 76.25 per dollar,
eclipsing its historical peak of 79.75 hit in the aftermath of the Kobe
earthquake.
A strong yen could make it more difficult for the heavily
export-dependent Japanese economy to recover from the triple blow of
last week's earthquake, tsunami and nuclear threat. The damage toll is
already estimated at up to $200 billion with Japan almost certain to
slip back into recession.
G7 financial leaders may also 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 United States.
Investors were also keeping a wary eye on events in Libya as the United
Nations voted to impose a no-fly zone over the country and use all
necessary measures to protect civilians. French diplomatic sources said
military action could begin within hours of the Security Council vote.
Oil prices were up over $2 a barrel on the decision, which was seen as
risking prolonging the conflict in the North African nation.
HISTORY NOT IN G7's Favor
Still, if past is prologue, even massive official selling might not restrain the yen for long.
When Japan last intervened in September 2010 it sold a huge 2.1 trillion
yen, or around $25 billion back then, but only managed to push the
dollar up from 82.85 to 85.77 yen.
The shock value quickly faded and by late October the dollar was down around 80.00.
"History isn't on the G7's side," said John Normand, a forex analyst at
JPMorgan, noting past acts of concerted intervention only worked when
backed by central bank tightening.
In this case, there is almost no chance of the Federal Reserve
tightening for months to come. The European Central Bank has signaled an
intent to hike rates in April, but that might not help the dollar
against the yen.
"The G7 can be a market mover initially, but it shouldn't be a
trend-changer any more than the September 2010 yen intervention was,"
argued Normand.
The G7 comprises Canada, France, Germany, Italy, Japan, the United Kingdom and United States.
HEIGHTENED ANXIETY
Late Thursday, President Barack Obama said the United States will do all
it can to help Japan recover while playing down fears a drifting cloud
of radiation could reach the U.S. West Coast.
Rising alarm over the unfolding disaster in the world's third-largest
economy has sent shudders through markets, hitting shares and
commodities, as investors sought the safe haven of government debt.
Japanese military helicopters and fire trucks doused an overheating
nuclear plant in the northeast of the country with water on Thursday to
try to limit the damage from the world's worst nuclear accident since
Chernobyl in 1986.
The G7 call 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
nearly 80 years.
Europe continues to wrestle with a crippling debt crisis, and the Fed is
buying up domestic government debt to safeguard a stop-start economic
bounce back in the United States.
"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.
Japan's triple disaster, unprecedented in a major developed economy, is already disrupting global manufacturing.
Makers of equipment for mobile telephones to car makers and chipmakers
have warned of a squeeze on their businesses given Japan's crucial role
in many supply chains that keep global commerce ticking over.
The technology sector felt an immediate impact after Friday's quake and
tsunami since Japan makes around a fifth of the world's semiconductors.
Economists fear an extended slump for the world's third-biggest economy.
The sheer complexity of the damages makes it difficult to grasp the
impact of the earthquake," says Kyohei Morita, an economist at Barclays
Capital.
"Indeed, an analysis of the domestic real economy alone requires an
assessment not only of building damages but also lifeline disruptions,
planned blackouts/voluntary energy conservation and the state of nuclear
power generation."
The Nikkei newspaper on Friday reported the government was considering
mandatory power usage cuts for businesses and households to avert a
major blackout in greater Tokyo.
The government also announced plans to issue 10 trillion yen in
emergency bonds to fund reconstruction, adding to an already massive
mountain of public debt.
Still, the effect on global growth may be more limited. BNP Paribas
estimates the disaster will shave 3 percent from Japan's projected GDP
this year. That would account for just 0.2 percent of world output.
(Additional reporting by Leika Kihara, Daniel Flynn, Glenn Sommerville and Lesley Wroughton; Editing by Ed Davies)