The Group of Seven showed Friday that it still has the ability to bring global investors to heel, as its first co-ordinated intervention in foreign exchange markets in more than a decade stabilized the yen after several days of extreme volatility.
Japan's currency fell from Thursday's record, a relief to Japan's government as it struggles with a humanitarian disaster.
The G7's clout, diminished in the past couple of years by the rise of the more inclusive Group of 20, will be tested when active trading resumes Monday. Markets in Japan will be closed for a holiday, but that won't stop traders from buying yen elsewhere - if they dare.
After pushing the yen to a postwar high of 76.25 to the U.S. dollar, an appreciation that included a startling 4.3-per-cent gain in 10 minutes of trading Wednesday evening, investors backed down Friday in the face of concerted selling by central banks in Japan, Europe, the United States and Canada, a co-ordinated move aimed at holding down the currency of an economy already in deep trouble.
Many financial players were caught by surprise Friday, and David Watt, a senior currency strategist at RBC Dominion Securities in Toronto, predicts an uneasy stand-off on Monday.
"There are going to be a lot of people on the sidelines, with no one wanting to flinch and make the first move," Mr. Watt said.
G7 authorities would prefer that everyone holster their weapons and walk away before there's any more trouble. That could happen as investors reflect on the contradiction of a country in the midst of a historic crisis being saddled with one of the world's strongest currencies.
The yen appeared to accelerate on speculation that the Japanese will sell tens of billions of dollars in overseas assets to rebuild from last week's earthquake and ensuing tsunami - a repatriation of funds that analysts say has yet to occur, and that is unlikely to happen to the degree suggested by the yen's rise. The implication is that the surge was driven by speculators, rather thanJapanese insurance firms gathering yen for reconstruction.
Unlike its previous intervention in September, 2000, to prop up the euro, which was two years old and struggling to gain the confidence of traders, the G7 doesn't appear to want to fundamentally change the value of the yen.
Until Wednesday's sudden surge, the Japanese currency was trading fairly close to its historic average, Jens Nordvig, the New York-based global head of G10 currency strategy at Nomura Holdings Inc., said on a conference call Friday.
"There is no economic reason to live with a higher yen at such a dreadful time when it should be much lower," said Wendy Dobson, co-director of the Institute for International Business at the University of Toronto's Rotman School of Management and a former associate deputy minister in Canada's Finance Department.
The G7's intervention showed the group still has the resolve to rally to the aid of one of its own.
G7 members, the U.S., Japan, Germany, Britain, France, Italy and Canada, have been meeting as a group since the late 1970s under the auspices of steering the global economy. However, the financial crisis demonstrated that the world economy had become more than the postwar economic powers could control on their own. The G20, which includes emerging markets such as China, India and Brazil, was designated the primary body for co-ordinating economic policy at a summit of G20 leaders in Pittsburgh in 2009.
A stronger currency is a burden for Japan's exporters at a time when the country's economy can least afford it. The quake and ensuing tsunami killed thousands, and the destruction has disrupted production at companies such as Toyota Corp. and Sony Corp. The country remains on edge as authorities struggle to contain radiation leaks at a shattered nuclear plant.
"A targeted strategy to take some of the pressure off the yen in Japan's time of exceptional need is a great example of how macro policy co-ordination among the major economies can make a positive difference," said Glen Hodgson, chief economist at the Conference Board of Canada in Ottawa and a former official at Canada's Finance Department.
In a statement after the meeting via conference call on Thursday evening, G7 finance ministers and central bankers said they were ready to "provide any needed co-operation" as Japan rebuilds.
But the statement also hinted at concern that this week's unusual trading in the yen risked triggering a broader crisis in international markets. "As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," officials said. "We will monitor exchange markets closely and will co-operate as appropriate."
That suggests the trigger for further action will be a sudden jump from what officials consider fair value of the Japanese currency. Many analysts reckon the G7's central banks will hold their fire as long as the yen holds a value of around 80 to the U.S. dollar.
"Above all, the G7's role was an attempt to stabilize markets," Camilla Sutton, chief currency strategist at Scotia Capital in Toronto, said in a research note Friday. "Any further disorderly movements in (the dollar-yen rate) will likely be met with renewed commitment from the G7."
The Bank of Japan led the action, exchanging some ¥2-trillion for dollars, a transaction worth about $25-billion (U.S.), Bloomberg News reported, citing a Japanese official. The European Central Bank, the Bank of France, Germany's Bundesbank, and the Bank of Italy followed as markets opened in Europe, selling yen to weaken the Japanese currency's value. The Federal Reserve and the Bank of Canada did the same as trading began in North America.
Central banks in Europe and North America declined to reveal the scale of their yen sales. Currency analysts estimated their contributions were largely symbolic - the equivalent of a shot across the bow to show traders that their monetary authorities are watching.
In September, Japan intervened unilaterally to weaken the yen after the currency had strengthened at that point to about 83 to the dollar, a decision that drew scorn from European officials, who accused the Japanese government of seeking an advantage for its exporters.
The Bank of Japan sold ¥2-trillion in that effort and then backed down. Japanese authorities will have a better chance of fighting currency traders with the backing of the G7, analysts said.
"It's very important to remember what happened in September," Mr. Nordvig said. The Japanese government now has "the clear backing of the G7," he said. "It makes the operation that much more likely to have a permanent impact."