Japan crisis deepens as G7 steps in to stabilise soaring Yen

The G7 group of the world's richest nations have moved to devalue the Yen after it hit its highest level against the dollar since WWII.

by Andrew Saunders
Last Updated: 06 Nov 2012
The move is the first such co-ordinated effort to intervene in a currency since the early days of the Euro back in 2000, and highlights growing concerns in the international markets that the long term effects of the disasters in Japan could be severe.  ‘I think the world economy is going to go right down, and it has happened at a time when financial markets are still fragile,’ one anonymous G7 central banker told Reuters this morning.

A very strong Yen is bad news for Japan, of course, as it is such a huge exporter. Even the news of the intervention had a calming effect - having reached 76.25 Yen to the dollar yesterday, its highest for 65 years, this morning the rate was back down to 81.44.

But why did the Yen rise so spectacularly in the first place? Surely one would expect the currency of a country battered so relentlessly by such a string of disasters as Japan has been in the last week, to collapse rather than strengthen? Well, yes but no, as Vicky Pollard might say. Japanese institutions hold vast sums of foreign-denominated assets, which may be converted back to Yen and repatriated in order to pay for the post-earthquake reconstruction.

That’s one factor. Then there’s the carry trade - a currency trading technique that exploits Japan’s ultra low interest rates. Traders borrow in Yen and use the loans to invest in something rather more lucrative - the Brazilian Real for example. This is popular not only with Japanese financial institutions but also with private individuals - Mrs Watanabes as they are known. These investors are likely to be exiting their trades and getting back into the Yen, as the domestic financial implications of the earthquake hit home.

Hence the drive by the G7 to express solidarity with Japan and to do their level best to give the reeling nation a bit of an economic break at least. But the history of currency interventions is not a happy one - remember Black Wednesday - even when they are jointly undertaken. So any effect is likely to be fairly short-lived. Which brings us to the other big question - is the upward pressure on the yen going to last? Most commentators seem to think that it will not, and that once there is more ‘visibility’ of the path that the Japanese economy will be taking post-disaster things will calm down a bit. But the truth of course, as with so much of the grisly situation in Japan, is that it’s too early to say with any certainty.

Meanwhile, staff at the Tokyo offices of many investment banks have donned tin hats (or should that be radiation masks) and kept on trading - there is big money to be made out of the sort of huge swings in currency and bond prices that have been the order of business this week. Food, transport and even temporary accommodation has been laid on for key bank staff, whilst others are flying in big cheeses from Hong Kong and Singapore to rally the troops. There’s even a rumour that JP Morgan boss Jamie Dimon might be headed to Tokyo as we write.

All well and good for their businesses, but whether this sort of thing is going to help the banking industry’s already heavily tarnished public image much is open to question…

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