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G7 'preparing to drive down the yen'

Members of the Group of Seven (G7) nations may be considering a joint market intervention to prevent a further surge in the yen as the Japanese currency’s sharp rise threatens the world’s second biggest economy and other Asian economies.

The yen, which is trading at around Y93 against the greenback, lurched higher today, despite the afternoon warning statement from the G7 and direct comments by the Japanese Finance Minister that currency traders said amounted to “the clearest possible” signs the Japanese Government was poised to intervene in the markets.

Analysts interpreted a rare currency volatility warning by the G7 as a sign that Japan and others may step in to foreign exchange markets and artificially force down the Japanese currency if the yen breaches the Y90 level against the US dollar.

Japanese government sources told The Times that if it intervenes to fight the prevailing market tide and weaken the yen, it “may do so with the support of other G7 nations”.

In its relentless surge higher, the yen has smashed through levels previously thought to offer more resistance. Some analysts believe that its rally may continue to Y79 – a level that would be devastating to the earnings of companies such as Toyota, Canon and Sony.

An intervention drive by the Japanese authorities could prove hugely costly: the Government would be forced to sell the yen heavily in favour of dollars and would be doing so against the powerful tide of yen-buying triggered by the global unwinding of the carry trade - the investment practice where the Japanese currency was borrowed on a large scale to finance investments around the world.

Although the Bank of Japan has remained tight-lipped on the question of currency intervention, Shoichi Nakagawa, Japan's Finance Minister, said today that he saw "excessive volatility" in the yen's exchange rate and that he was he “watching with great interest.”

This was the kind of language used by the Japanese Government during its most recent – and spectacular – bout of intervention in early 2004 where it amassed tens of billions of dollars in its effort to weaken the yen and make the country’s exports more attractive.

“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,” said the G7 statement, adding that all members “shared interest in a strong and stable international financial system” and would “co-operate as appropriate.”

Currency traders at Royal Bank of Scotland in Tokyo said that verbal intervention was no substitute for the real thing, and that Japan and the other G7 nations needed to move before any traders would believe they were serious.

Analysts at Société Générale gave warning that even if joint G7 intervention were carried out, the effects would not be long term until the yen carry trade had unwound and the pressures it is creating are relieved. “No matter what authorities do, the yen's longer-term strength will likely remain for the time being,” said SG’s chief of foreign exchange.

In what one Macquarie economist described as “slow torture” for Japan’s big exporters, the yen worked its way towards a 13-year high against the US currency, and hit an all-time high against the Australian dollar. It is trading at a six-year high against the euro, and analysts at Nomura predict further rises in the course of the next few hours as London trading begins.

The speculation came as Asian markets began the week with a sudden, panicky plunge: Tokyo dealing floors ended the day in a maelstrom of sell orders that left the benchmark Nikkei 225 Index 6 per cent lower and at a closing low not touched since 1982.

“If ever there were a sign that nobody knows where to trade, this session was it” said one Daiwa Securities broker in Tokyo. “We are seeing the effect of massive hedge fund redemptions, some margin calls, and some fairly vague expectations about what the Japanese Government is going to do about stimulating the markets.”

The severe collapse in market confidence prompted Taro Aso, Japan’s Prime Minister, to call on his cabinet to draft emergency measures to quell the panic. Despite the Japanese Government’s well-earned reputation for slow decision-making, proposals to suspend short-selling and for the state to begin buying stocks held by the banks could be implemented by the end of today.

“Trading floors were prepared to give the Government the benefit of the doubt on this, but nothing is stopping the Nikkei falling at the moment,” said one Mizuho broker. “The Japanese stock market is being used as the Western world’s ATM at the moment because funds can sell out and get their hands on money fast here”, he added.

The Tokyo selling came amid a flurry of unsettling news from Japan’s banking sector, which is starting to look more vulnerable than previously thought and whose largest names – Tokyo Mitsubishi, Mizuho and Sumitomo Mitsui - have begun to look at emergency capital-raising measures.

Japan’s financial industry holds vast portfolios of stock, and has suffered heavy paper losses over the past eight weeks as shares have spent complete sessions in freefall. Some analysts, including Kristine Li of KBC Securities and David Marshall of Fitch Ratings Service have given warning that sharp market declines could soon threaten the capital adequacy ratios of many Japan’s banks.

Monday’s acute closing sell-off, which followed a session of extreme swings in the Nikkei Index, came as the yen continued its remorseless surge against the US dollar – an effect which currency brokers at Tokyo Mitsubishi UFJ blamed on the unwinding of yen carry trades that have financed so much commodity and stock speculation by now collapsing hedge funds.

Japan’s fast-developing currency crisis – one of Asia’s most dramatic ripple effects from the global credit meltdown – came amid a frenzy of regional market volatility in stocks, bonds and foreign exchange. Hong Kong shares fell more than 10 per cent and Singapore shares were also hit hard in the flight. Facing its own domestic version of the credit crisis and the possible collapse of its heavily leveraged household sector, the notoriously hawkish Bank of Korea slashed interest rates by 0.75 per cent in its biggest one-day cut on record.

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We were in Japan for just over 3 wweks and what worked out to be least exnvispee for us was to get a 2-week pass, where we did intensive travel, and once we settled down in the Kansai / Kyoto areas, we went with point-to-point fares.

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