We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.The mighty yen is attributable in part to the continuing unwinding of the carry trade. Given the low interest rates on yen borrowing that have existed for quite some time to combat domestic deflation, many speculators have used the yen as funding currency to obtain higher yielding ones such as the Australian and New Zealand dollars, pocketing the interest rate differential. With risk aversion setting in, the carry trade is going the way of the dodo. The super-strong yen is hurting the prospects of Japan's export industries, and this is now causing further concern for G7 officials. From Reuters:
The Group of Seven warned on Monday the surging yen posed a threat to financial and economic stability, the latest coordinated effort by the world's richest nations to curb the worst financial crisis in 80 years...Japan was in focus with a brief G7 statement singling out the yen, fanning speculation of the first Bank of Japan currency intervention in four years...Will (or can) the G7 get together and launch a Plaza Accord-style joint agreement to weaken the yen? Or, will Japan try to go it alone and intervene for the first time in four years? Lest we forget, it has the world's second largest pile of reserves at a trillion plus dollars. Then again, intervening may be a drop in the bucket in this day and age. It will be interesting to watch, although the expected size of any effective effort may preclude one from being launched. Here are some other comments to consider collected again by Reuters:
The yen's rapid 12 percent ascent against the dollar has threatened Japanese exports as the world's second-largest economy lurches toward recession...The dollar, however, is rising against major currencies, except for the yen, so there was some skepticism about whether any coordinated action on the economy would be forthcoming.
Meanwhile, three of Japan's top lenders -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -- were said by Japan's media to be looking to raise cash to offset share losses...Prime Minister Taro Aso said after an emergency meeting the government would expand a scheme that allows banks access to public funds and tighten rules on short-selling shares.
- "The G7 statement showed the group's willingness to stabilise foreign exchange rates, particularly to curb excessive volatility in yen moves, with an eye on a possible joint currency intervention," former Bank of Japan official Eiji Hirano.
- "Given the panicky and irrational movements of the yen of late, the Japanese authorities may conduct intervention independently," - Kazuyuki Kato, Mizuho Trust & Banking.
- "Launching intervention independently is like a drop in the bucket, and like fighting against the whole world," Ryohei Muramatsu, Commerzbank, Tokyo.
Bloomberg chips in a contrary quotation from "Mr. Yen" himself, Eisuke Sakakibara:
``Issuing such a statement is a sign of failure to intervene,'' said Eisuke Sakakibara, a professor at Tokyo's Waseda University who was the Finance Ministry's top currency official from 1997 to 1999. ``The Japanese government may have consulted with their counterparts in the EU and the U.S. and they couldn't persuade them to intervene.''Certainly, things are getting really bad in Japan with the Nikkei reaching a twenty-six year low at 7,162.90. Bloomberg adds that the Dow Jones was at 965.97 back then and Michael Jackson's Thriller wasn't even released yet (yes, it is a milestone of sorts). The lyrics of the title song are oddly appropriate for Japan with its current situation: You're fighting for your life inside a killer, thriller tonight...