March 18th, 2011
07:01 AM GMT
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(CNN) – “Coordinated foreign currency intervention” may prove a mouthful, but get used to it. It’ll be the catchphrase for the next few news cycles, as we talk about Japan’s attempt at economic recovery. And as one J.P. Morgan analyst told me, this intervention is “a big deal.”

G7 finance ministers and central bank governors held a special conference call early Friday morning Tokyo time. Their goal with this intervention: to weaken a super strong yen. And at least for today, their actions are working. Before the G7 announcement, the yen was trading at around the 79 yen to the dollar mark. Right after the communiqué was released, the yen weakened sharply to push past the 81 yen mark.

But wait, a two-yen uptick? Is that really significant? You bet.

Check out my producer Pamela Boykoff’s blog about how that translates into millions of dollars gained or lost. You see, Japan is a huge exporter country and relies on overseas sales for much of its growth. Think of your Toyota car, Sony computer or Canon camera. If the yen is strong, then that cuts into the profits of those companies. In the most simplistic of terms, if you had a dollar, would you want 81 yen (a weaker yen) or 79 yen (a stronger yen) when you exchange it? You probably want more yen. That’s what Japanese companies want too.

And with Japan’s natural and nuclear crises strengthening the yen, desperate times are calling for desperate measures. The G7 has signaled its recognition of this, and with its announcement today, they’re basically saying, “Japan, we’ll help you out on this one.” This is despite the international community’s general aversion to foreign currency intervention - Think China’s control of the yuan or the flack the United States got over last year’s QE2, or quantitative easing “Part 2.” That’s when the Federal Reserve did the equivalent of printing millions of dollars and pumping that into the U.S. financial system. (Critics say that was meant to weaken the dollar. The Fed says that wasn’t the goal, just a side effect.)

Back in Japan, intervention today was expected, the J.P. Morgan analyst said, but only for Japan to unilaterally intervene in its own markets. What was an unexpected and stronger move was the “coordinated” part of the coordinated foreign currency intervention. The United States, UK, Canada and the European Central Bank are included. For now, we don’t yet know how big their interventions will be, but we’re hearing it may mostly involve dollars and yen as opposed to the other currencies. And one of my Barclays contacts said today’s announcement did not disappoint. A Barclays research note included this, “While the effectiveness of the intervention remains to be seen, in our view the G7 delivered a strong message and action, and did not undershoot expectations.”

That’s good news for now. The question after today is, how long will the G7’s actions serve to keep the yen weaker? All analysts I spoke to say that it will only be for the short-term, perhaps just a matter of weeks, until we see the yen strengthen again. Next intervention, please?

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Filed under: AsiaBankingBusinessJapanMoney

soundoff (4 Responses)
  1. George

    If we follow this logic to its conclusion, Japan would benefit if the yen falls to 1000 per dollar. Well, the analysis assumes prices are fixed. Even if the yen is strong, there is nothing to prevent Japanese companies from lowering their prices, so foreign importers still would get the same for the dollar. Of course, there is a time lag effect, and contracts are already signed, but eventually it would stabilize. The problem is large and unexpected fluctuations that are caused by speculation and do not reflect the actual state of the economy.

    March 18, 2011 at 9:43 am |
  2. Alan

    George, your argument is somewhat simplistic. With the strong Yen it is difficult for Japanese companies to simply lower the selling price as their costs remain high. By devaluing the Yen the costs of Japanese manufacturing would decrease relative to the Euro/USD and therefore the Selling Price (in Euro/USD) would also be lower – boosting sales.

    March 18, 2011 at 1:04 pm |

    Speculation – again. Much of what happens in the market is driven by speculation, especially in the modern, media-driven society. I have no doubt that a single frantic, meaningless news article could drive the nation's/world's economies into the bucket – until someone actually checks the facts. We're an information-driven society where the quickest and most popular information gets all of the attention – even if the information is false.

    March 18, 2011 at 1:18 pm |
  4. icon pack

    You the talented person

    October 9, 2012 at 12:07 am |

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