The Group of Seven rich nations tried to cool a rally in the yen with a warning against volatility on Monday as Tokyo scrambled to shield its largest banks from a spiralling global financial crisis.
A brief G7 statement singled out the yen, fanning speculation of the first Bank of Japan currency intervention in four years, but market reaction was muted because investors doubted G7 resolve to act together and Japan's ability to succeed alone.
The yen's rapid 12 percent ascent against the U.S. dollar in the last month has threatened Japanese exports as the world's second-largest economy lurches toward recession. [ID:T78987] [ID:T13538]
"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," said Kazuyuki Kato, foreign exchange trader at Mizuho Trust & Banking in Tokyo.
Although its economy is shrinking, Japan's financial system has escaped the worst of the crisis that has destroyed banks from Wall Street to Iceland because they had less exposure to credit instruments tied to the imploding U.S. mortgage market.
But Japanese banks have now been sideswiped by a stock market crash that has erased a third of the Tokyo market's value in October and put it on course for the worst month in its history. Three of Japan's biggest lenders — Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group — are looking to raise cash to offset stock market losses, Japanese media reported.
LOWEST SINCE 1982
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, as Mitsubishi UFJ, Japan's biggest bank, dropped 15 percent and the Nikkei benchmark sank to its lowest close since 1982.
Elsewhere in the region, South Korea resorted to a record interest rate cut and Australia's central bank intervened to support its currency for a second day as policymakers grappled with the 15-month-old crisis that has shattered investor confidence, and threatens jobs and corporate sales.
The actions and words did little to change the mood among investors. Asia-Pacific shares outside of Japan fell 3.4 percent to a four-year low, according to an MSCI index. Safer assets such as government bonds and gold traded higher on the day. The yen climbed towards a 13-year high against the dollar.
"Whether what we're seeing right now from policymakers is sufficient is difficult to tell. The price action alone in markets tells me not," said Dwyfor Evans, currency strategist with State Street Global Markets in Hong Kong.
Developing nations have been turning to the International Monetary Fund for help to stave off the worst global financial crisis since the Great Depression in the 1930s.
Hungary had reached an agreement to get a "substantial financing package" in the next few days that will include funding by the European Union and some individual European governments, the IMF said. [ID:nN26287887] The IMF agreed on a $16.5 billion loan package for Ukraine on Sunday.
While for most industrialised countries, the financial firestorm is threatening to mutate in to deep recession, Japan's ordeal appears to be following the opposite course, with economic trouble developing into market turmoil that now threatens banks.
Japan's longest economy postwar expansion probably ended with a second quarter contraction, and exports to the United States have been falling for 13 months.
Japanese exporters fear a surging yen may snuff out any remaining demand for their products. The yen was near a 13-year peak against the dollar on Monday as Japanese investors spooked by market turmoil bailed out of foreign currencies and brought money home.
The markets turmoil is now coming full circle, putting the skids under the Japanese financial system.
DO SOMETHING
Shares of the big Japanese banks tumbled on concern they may need to raise billions of dollars each to replenish capital lost in the stock market slump.
MUFJ is considering raising up to 1 trillion yen ($10.8 billion) to shore up its capital, people familiar with the matter have said. [ID:nT73810]
Mizuho, Japan's second-largest bank, and third-ranked Sumitomo Mitsui, are both looking to raise as much as 500 billion yen ($5.4 billion), newspapers reported on Monday.
"The government will have to do something for banks," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
Prime Minister Aso said the government would expand a scheme that gives banks access to public funds. On Sunday, Economics Minister Kaoru Yosano said a newly announced bank bailout scheme should be increased to nearly $110 billon.
Aso said a state body should be used to buy shares from banks, and rules should be relaxed to make it easier for banks to raise capital. He called for extending tax relief on income from stocks and dividends.
South Korean policymakers took their most dramatic measures yet in a months-long battle to buttress confidence in an economy facing its sternest test since the Asian financial crisis a decade ago.
The Bank of Korea cut its main interest rate by 75 basis points to 4.25 percent in an unscheduled meeting. The rate cut was the biggest on record and only the second emergency move since the bank adopted its current monetary policy system; the first was after the Sept. 11, 2001 attacks on the United States.
President Lee Myung-bak pledged to increase government spending and to cut taxes to support Asia's fourth largest economy, which grew at the slowest quarterly pace in four years during the last quarter.
The Bank of Korea also cut rates earlier this month after major central banks including the Federal Reserve, the European Central Bank and the Bank of England delivered an unprecedented coordinated rate cut to halt the dizzying slide in markets.
The U.S. Federal Reserve is widely expected to announce a 50 basis-point cut in overnight rates on Wednesday that would take its benchmark to 1 percent, the lowest since June 2004. Some analysts expect a reduction to 0.75 percent.
