Banks join forces to fight yen speculators

THE WORLD’S most powerful central banks joined forces to sell billions of dollars worth of yen, battling speculators – described as “sneaky thieves” by one Japanese official – who have driven the currency to record highs.

The intervention by banks including the Federal Reserve, European Central Bank, Bank of Japan and Bank of England began early yesterday, after ministers from the Group of Seven most industrialised nations approved the first such co-ordinated action in more than a decade.

Traders estimate more than $25 billion was spent by the world’s richest nations, a great deal of it by Japan, in an effort to drive the Japanese currency sharply lower against the dollar after it soared to a postwar high of Y76.25. The rise was the result of dealers betting Japanese insurers and other big companies would have to repatriate funds to meet claims and pay for reconstruction. Its strength threatens to inflict further pain on Japan as it struggles with the aftermath of last week’s earthquake, tsunami and the risk of a nuclear meltdown.

Costs to the insurance industry could yet reach the levels of the record $40 billion-plus claims from Hurricane Katrina. RMS, the only leading catastrophe loss forecaster to publish an estimate, told clients it expected total economic losses to be between $200 billion and $300 billion.

Fumihiko Igarashi, Japan’s deputy finance minister, warned foreign exchange markets they should not assume yesterday’s intervention was a one-off move.

“G7 countries agreed that if we caved in to such speculators that took advantage of people’s misfortunes, the Japanese economy would be ruined and the whole world economy would be harmed,” he said. “Our stance remains unchanged that we will take decisive steps against speculators who act like sneaky thieves at a scene of a fire.”

News of the G7 action sent the yen tumbling, to Y81, and triggered a rebound in Japanese stocks that rippled across Europe and the US. The SP 500 was trading 0.7 per cent higher early yesterday afternoon after the Nikkei bounced 2.7 per cent. Japanese shares still ended more than 10 per cent down on the week.

“This is one of the most transparent interventions of size I have seen. No beating around the bush, no hush-hush,” said a senior trader at Citigroup. “This is sanctioned by the G7 to save Japan and, indirectly, global growth momentum. It will continue all day and all week.”

The yen is a powerful influence on Japan’s economy and its sharp appreciation represented a threat.

“Excessive currency volatility negatively affects consumer sentiment,” said Kaoru Yosano, Japan’s economy minister. “The significance of the intervention is to limit share price and currency moves within market expectations.”

The central banks’ move capped a frenetic week for financial markets, during which Japanese stocks suffered their biggest two-day fall since the 1987 crash. Investors pulled $8.2 billion from equity funds, the most since July, and $4.3 billion from money market funds in the week to Wednesday.

Traders said the Bank of Japan sold Y2,000 billion ($25 billion) against the dollar, similar to the record Y2,125 billion it sold to weaken its currency last September. The Fed and the Bank of Canada confirmed they had been selling the yen too. – (Copyright The Financial Times Limited 2011)