Japan bought billions of dollars to restrain a soaring yen on Friday and traders reported intervention by European central banks, kicking off joint action by the world's richest nations to calm markets made nervous by Japan's nuclear crisis.
After a week of panicky trading, the U.S. dollar surged two full yen to as much as 81.83 yen, leaving behind a record low of 76.25 hit on Thursday, as the Bank of Japan stepped into the market.
Traders and media reports estimated it bought more than $25 bln. Others reported central banks in Europe were selling the yen for euros in what was the Group of Seven's first combined intervention in a decade.
European stock markets rose in early trade in response.
"It's going to have a very huge resonating effect on the market," said Kathy Lien, director of currency research at GFT in New York.
"Because the only type of intervention that actually works is coordinated intervention and it shows the solidarity of all central banks in terms of the severity of the situation in Japan."
Japan's Nikkei share index climbed close to 3%, recouping some of the week's stinging losses as Japan reeled from an earthquake, tsunami and the nuclear power plant crisis. The market's losses for the week are 10%.
The G7 announced its intent to jointly intervene after a short teleconference early on Friday in a demonstration of solidarity with disaster-hit Japan.
The decision came as a surprise to many because Tokyo had indicated it was looking for moral support for its attempts to assuage markets rather than joint action.
The last joint intervention was a decade ago when the rich nations moved to turn a slumping euro following its 1999 launch.
Japan's Finance Minister Yoshihiko Noda said the Bank of Japan had begun to sell yen at 0000 GMT and other central banks from the G7 would intervene as their markets opened.
A source told Reuters the BOJ would also leave the yen it sold in the banking system rather than mopping it up, thus adding to the vast amount of liquidity it had already provided to support its domestic markets.
Central banks will often issue bonds to soak up any extra cash in the economy that results from currency intervention for fear that the additional liquidity could fuel inflation.
REPATRIATION
The yen's surge this week was driven by speculation that Japanese firms would repatriate some of their huge foreign assets to help meet insurance claims and pay for reconstruction.
That added to what has been a bullish run for the currency in recent years, driven by its status as a "safe haven" since the 2008 financial crisis and investors' use of it as a very low-interest funding currency for more risky investments.
An even stronger yen could make it more difficult for the heavily export-dependent Japanese economy to recover from the triple blow of last week's earthquake, tsunami and nuclear threat. The damage toll is already estimated at up to $200 bln with Japan almost certain to slip back into recession.
"The aim is obviously to support our Japanese partner, express our solidarity and obviously to halt the yen's rise," French finance minister Christine Lagarde told French radio.
"The country has suffered enough catastrophe and calamity to try to avoid, in addition, a deep economic and then financial crisis resulting from a rising currency and preventing the Japanese from exporting as they usually do," she said added.
G7 financial leaders may be worried that a surge in yen repatriation could create a crisis of market confidence that spreads from Asia to Europe and the United States.
"As we long have stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," the G7 said in a statement.
Investors were also keeping a wary eye on events in Libya as the United Nations voted to impose a no-fly zone over the country and use all necessary measures to protect civilians. French diplomatic sources said military action could begin within hours of the Security Council vote.
Oil prices were up $2 at almost $117 a barrel on the decision, which was seen as risking prolonging the conflict in the North African nation.
HISTORY NOT IN FAVOUR
Still, if past is prologue, even massive official selling might not restrain the yen for long.
When Japan last intervened in September 2010, it sold a huge 2.1 trln yen, or around $25 bln back then, but only managed to push the dollar up from 82.85 to 85.77 yen.
The shock value quickly faded and by late October the dollar was down around 80.00.
"History isn't on the G7's side," said John Normand, a currency analyst at JPMorgan, noting past acts of concerted intervention only worked when backed by a tightening of monetary policy.
In this case, there is almost no chance of the Federal Reserve raising interest rates for months to come. The European Central Bank has signalled an intent to hike rates in April, but that might not help the dollar against the yen.
"The G7 can be a market mover initially, but it shouldn't be a trend-changer any more than the September 2010 yen intervention was," argued Normand.
The G7 comprises Canada, France, Germany, Italy, Japan, the United Kingdom and United States.
HEIGHTENED ANXIETY
Late Thursday, President Barack Obama said the United States will do all it can to help Japan recover while playing down fears a drifting cloud of radiation could reach the U.S. West Coast.
The G7 deal and Obama's statement suggest a heightened degree of concern among top policymakers at the threat posed by the disaster at a time when the global economy is still recovering from its worst downturn in nearly 80 years.
Europe is wrestling with a debt crisis, and the Fed is buying up domestic government debt to safeguard a stop-start economic bounce back in the United States.
"I think the world economy is going to go right down, and it has happened at a time when financial markets are still fragile," said a G7 central banker who declined to be named.
Japan's triple disaster, unprecedented in a major developed economy, is already disrupting global manufacturing.
Makers of equipment for mobile telephones to car makers and chipmakers have warned of a squeeze on their businesses given Japan's crucial role in many supply chains that keep global commerce ticking over.
