G7's Yen
Intervention a Step Toward Decisive Cooperation
"We
mustn't allow the earthquake to hamper the global economy just as it has
finally begun to recover from the shock of the financial crisis. It is clear that
the shared acknowledgement of this threat brought together the international
community to control excessive currency fluctuations."
It was a swift response. During
an emergency conference call on March 18, the finance ministers and central
bankers of the G7 decided to intervene jointly in currency markets. Japanese,
American, British and Canadian central banks and the European Central Bank agreed
to sell yen reserves.
Following the immediate intervention
by the Bank of Japan, the value of the yen dropped by 2 yen, to 81 yen against
the dollar on the Tokyo foreign exchange market. Hopes are that international
cooperation will continue to maintain the yen at reasonable levels.
Last week’s earthquake and
subsequent nuclear crisis have wreaked incalculable havoc on the Japanese
economy. Yet, counterintuitively, on March 17, the yen strengthened to record a
post-war high of 76.25 yen to the dollar.
The sharp rise of the
currency by nearly 5 yen in a single day is abnormal to say the least.
Speculative motives appear to have played a part. The strong yen compounds the woes
of exporters the most. The gravity of the situation is such that we cannot
afford to stand idly by.
The previous post-war high
was 79.75 yen to the dollar, recorded in April 1995 after the Kobe earthquake. Some
analysts believe that the recent spike in the yen was triggered by a perceived
association between earthquakes and a strong yen.
VIDEO: Assessing the
global economic impact of the crisis
in Japan, from the Financial Times, U.K., Mar. 17,
00:03:54
Another explanation is that
speculators rushed to buy yen on the expectation that Japanese insurers would
repatriate dollar-denominated assets to prepare for massive payouts. However, insurers
have stated they haven't converted any foreign assets to yen, leaving the
possibility that the speculation was triggered by malicious rumors that were deliberately
spread.
Stock prices plummeted this
week on anxiety that in addition to the destruction wrought by the earthquake and
nuclear accidents, the sudden strengthening of the yen would irreparably damage
Japan's economy [chart below]. If such events were allowed to dampen already-fragile consumer confidence,
the repercussions would be severe.
We won't know the full extent
of the economic devastation for some time. What is certain is that many of the manufacturing
centers located on the Pacific coast of northeast Japan were severely hit. A
wide range of industries will be affected, from fisheries and agriculture to
tourism.
Posted by WORLDMEETS.US
Of particular concern, is
that the situation at the Tokyo Electric Power Company's [TEPCO]
Fukushima
Dai-ichi nuclear plant has yet to be resolved. But it is hoped that the radiation leak can be
stemmed before it spreads any further. Tohoku Electric’s Onagawa nuclear power plant and thermal power plant on
the Pacific coast have also shut down. Like TEPCO, Tohoku
Electric is concerned about the supply of electricity. If rolling blackouts go
on too long, they will harm productivity, employment and the general state of
the economy.
The Bank of Japan has
announced additional monetary easing to assuage concerns about the Japanese economy.
For now, it is important, above all, that the state and people unite to overcome
this ordeal. We mustn't allow the earthquake to hamper the global economy just
as it has finally begun to recover from the shock of the financial crisis. It
is clear that the shared acknowledgement of this threat brought together the
international community to control excessive currency fluctuations. The agreement
by the G7 to jointly intervene in the currency markets is a first step toward decisive
economic cooperation.
