The yen briefly hit a new low against the euro yesterday after the group of seven finance ministers and central bankers failed to agree that yen weakness was a common problem for the world's leading economies.
European and Japanese officials' warnings that yen weakness was not a "one-way bet" on the sidelines of the weekend G7 meeting in Essen, Germany, failed to nudge the Japanese currency higher.
Instead, traders viewed an oblique reference to the Japanese currency in the G7 communique as a sign there was no official appetite for any concerted action. It highlighted the power of the G7 to move markets and its powerlessness to achieve what it wants without unanimity.
Traders yesterday resumed their selling of the Japanese currency. The yen fell to a record low of Y159.00 to the euro in London although it recovered to Y157.87 by end of trading in London. Against the dollar, the yen fell towards a nominal four-year low of Y122.09 before recovering marginally to Y121.75.
After praising each economy, G7 finance ministers added: "We are confident that the implications of these developments will be recognised by market participants and will be incorporated in their assessments of risks."
This was, according to some ministers, a reference to the risks of a sudden rise in the yen.
G7 countries take very different stances on the yen. Japan refuses to be singled out for criticism and the US accepts that the yen's weakness is caused by market moves. Both countries are more concerned about China managing its exchange rate.
Britain is silent on the yen, even though sterling has moved ever higher against it in recent months. But continental Europeans have wanted the G7 to be more explicit in its concern over the yen. Even though these positions were known before the weekend, investors worried that there was a "low probability but high impact risk" the G7 would agree something more concrete, according to Julian Jessop of the London-based Capital Economics.
Since the finance ministers did not deliver, he said traders could get back to their preoccupation that the expected interest rate differential between Japan and other countries would rise.
David Bloom of HSBC said there had been a "one in 20 risk that the G7 would move the market, that's now gone". A weak yen helped both the Japanese and US economies as growth in Japan was the biggest driver of capital goods exports from the US.
The G7 meets in April in Washington, giving finance ministers and central bank governors another chance to affect exchange rate values. Pressure for a stronger stance may be greater then but a common position among the G7 would be required first.
