The Group of Seven rich nations tried to rein in the surging yen, saying its wild swings threatened stability, but failed to convince investors they were ready to jump into currency markets in the midst of a financial storm.
G7 finance ministers and central bank governors said they were prepared to act, if necessary, as the yen rocketed toward a 13-year high against the dollar, driven by an exodus of Japanese cash from emerging markets and other high-yielding investments.
"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," the G7 said in a brief statement.
"We continue to monitor markets closely, and cooperate as appropriate," the group, comprising the United States, Japan, Germany, Britain, France, Italy and Canada, said.
The yen barely paused for breath after the statement as investors bet Japan's G7 partners had little appetite for a fight with markets as they grappled with worst financial turmoil in 80 years.
This view gained ground after French Economy Minister Christine Lagarde told Bloomberg News the G7 was not planning to intervene to sell the yen.
"The yen has over the past 48 hours seen brutal trading that reflects a great volatility that's linked to current market moves," she was quoted as saying.
"We wished to support this possible intervention of Japanese authorities knowing this would be about a purely Japanese intervention," she said of the statement issued by the G7.
Asked specifically if the G7 would intervene to sell the yen, Lagarde said "no".
PANICKY MOVES
Some analysts viewed the G7 statement as a hint at possible currency intervention by the Bank of Japan, especially after the Australian central bank stepped into the market for a second day to support its dollar near record lows against the yen.
"Given the panicky and irrational movements of the yen of late, the Japanese authorities may conduct intervention independently," said Kazuyuki Kato, foreign exchange trader at Mizuho Trust & Banking in Tokyo.
"Such action may be taken if the dollar falls below the 90 yen level. But given the fact that the dollar is rising against major currencies, except for the yen, Japan is not likely to be able to win support for coordinated action."
But a former Bank of Japan official had a word of caution.
"The G7 statement showed the group's strong willingness to stabilise foreign exchange rates, particularly to curb excessive volatility in yen moves, with an eye on a possible joint currency intervention," Eiji Hirano told Reuters. Hirano, now a senior executive with Toyota Financial Services Corp., was assistant governor in charge of G7 talks until mid-2006.
Japan has not intervened in currency markets since 2004.
But the world's second-largest economy, which boasts currency reserves just shy of $1 trillion, has repeatedly taken on markets in the past decades, mostly to prevent the yen's gains from hurting its export champions, such as Toyota or Sony.
During the last episode, Japan bought $145 billion in the first quarter of 2004 to stem the yen's rise, piling on top of $200 billion spent in the previous year.
NEAR HIGHS
On Monday, the yen traded near an all-time high against the Australian dollar and near a 13-year peak against the U.S. dollar, as Tokyo shares slumped to a 26-year low, spurring a renewed wave of selling of higher-yielding currencies. It traded at around 93 to the dollar <JPY=>.
Fears that the financial crisis set off by a global credit crunch will drive the world economy into a deep and damaging recession, pummelled stock markets worldwide and wreaked havoc in currency markets.
The flight of shell-shocked investors from emerging markets and massive unwinding of investments in higher-yielding but riskier assets, has propelled the yen — a funding currency of choice for such deals — to multi-year highs.
The exodus forced several nations, particularly those that have relied on foreign capital inflows to finance investment and imports, to seek help from the International Monetary Fund.
The IMF is due to announce a "substantial financing package" this week for Hungary, one of the countries that drew Japanese investors looking for returns that topped interest rates of around 0.5 percent offered at home.
The Australian dollar became one of the latest casualties of the unwinding of risky trades, slumping to an all-time low against the yen and triggering intervention from the central bank.
BURST BUBBLE
The yen climbed nearly 19 percent so far this year against the U.S. currency, which itself has gained substantially against many emerging markets currencies and the euro, despite the grim outlook for the U.S. economy.
The Japanese currency gained 20 percent in trade-weighted terms this month alone, threatening to further undercut the Japanese economy with its exporters already smarting from a sharp downturn in the United States and Europe.
Central banks around the world repeatedly pumped billions of dollars into money markets and earlier month several of them cut interest rates in an unprecedented co-ordinated move to contain the damage from a credit rout set off by the U.S. subprime market meltdown 15 months ago.
But whereas countries such as South Korea have also frequently intervened to shield their currencies from the global upheaval, the world's top economic powers have so far refrained from taking on global currency markets.
Some analysts said the massive de-leveraging of world financial markets and rebalancing of investment portfolios mean that efforts to stem the yen's climb may be doomed to fail.
"As the bubble is bursting everywhere from the housing market and the derivatives market to emerging markets, investors are becoming more risk-averse and pouring more money into the yen, which is considered to be the safest currency," said Ryohei Muramatsu, manager of group treasury Asia at Commerzbank in Tokyo.
"Launching intervention independently is like a drop in the bucket, and like fighting against the whole world."
