October 27, 2008 / 5:48 AM / 11 years ago

Japan will likely go it alone in FX intervention

TOKYO (Reuters) - The Group of Seven (G7) financial heads warned against excessive volatility in the yen’s exchange rates and said in a statement on Monday they would cooperate as appropriate.

INTERVENTION IN THE PIPELINES?

*Analysts say the statement may give Japan the green light to intervene in currency markets to stem the yen’s rise, but that it would probably go it alone rather than taking coordinated action.

*Many market players suspect Japan may step into markets if the yen rises above 90 yen per U.S. dollar, but they doubt Tokyo’s intervention alone would stop the yen’s gain.

*The G7 singled out the yen in its statement for the first time since 2000. Back then, it supported Japan’s yen-selling intervention.

*Currently, 90 yen in the dollar/yen is seen as a critical level, partly because of fears that a break of that level could accelerate the yen’s rise through various option-related positions.

*Seasoned market hands also recall that in 1995 Japanese manufacturers shifted production to cheaper developing countries after the dollar fell below 90 yen. It eventually hit a record low 79.75.

*That would harm Japan’s export-led economy, which is in, or on the brink of, recession as many of its export markets are facing downturn.

*Asked about the possibility of currency intervention, Japan’s Finance Minister Shoichi Nakagawa said no decision on what to do had been taken but any response, if necessary, would be prompt.

*”We must take steps if necessary as a matter of course and will decide what those steps would be by watching the market moves and respond to them swiftly. But we haven’t yet decided what to do next,” he said.

WHY NOW?

*The statement came after the Japanese currency briefly hit a high of 90.87 yen per dollar on Friday, having risen more than seven percent on the day.

*It was also up nearly 12 percent on the day against the euro and 18 percent against the Australian dollar.

WHAT CURRENCY WOULD IT BUY?

*While some market players think coordinated intervention by the G7 cannot be ruled out, many think Japan will act alone.

*For Japan, selling the yen against the U.S. dollar seems most convenient way for intervention. But many countries have nothing to gain from buying the dollar from markets when just about everybody is scrambling to get dollar cash.

*The dollar has been firm against most currencies despite the grim outlook for the U.S. economy because banks having difficulty in borrowing the dollar bought it in currency markets. Dollar-buying by the G7 could only make the situation worse.

*Some analysts say Japan may buy the euro instead of the dollar and other currencies that have came under heavy pressure, such as the Australian dollar and South Korean won.

DROP IN THE OCEAN?

*Many analysts say intervention may have little impact, as yen-buying in the past week has been mostly driven by unwinding of carry-trade that has been built up over the years.

*For years, investors and speculators have borrowed the yen to take advantage of its cheap interest rates to use the proceeds to invest in high-yielding assets.

*As long as credit conditions are tightening across the globe, they will have to close their positions, regardless of whether Japan will intervene in markets or not, analysts said.

Reporting by Hideyuki Sano; Editing by Victoria Main

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