Finance ministers from the Group of Seven nations agreed to intervene in the currency market Friday to curb the yen’s rapid rise since the March 11 earthquake and tsunami.
Yoshihiko Noda, the Japanese finance minister, said the European Central Bank and central banks of the U.K., U.S. and Canada agreed with Japan to intervene. Market participants had expected Japan to act alone and were surprised by the unusual joint intervention.
This was the first joint intervention by G-7 central banks since 2000. “On balance, this means Japanese officials will look to manage yen volatility, rather than push prices in a given direction, suggesting renewed strength may be allowed to progress undeterred provided it progresses gradually,” wrote currency strategist Ilya Spivak in a DailyFX note, as quoted by Reuters.
Some wonder if the G-7 will have the political will to keep the yen at artificially low exchange levels. Axel Merk, who manages $550 million in three currency mutual funds, spoke to SmartBrief’s SmartBlog on Finance about the G-7 intervention. He notes that actions by central banks have little effect, long-term, on the $4-trillion-per-day trading in the foreign-exchange market.
“To quote George Soros, ‘What do you do when central banks intervene in currency markets? … You wait five minutes and then you start trading again,'” Merk says. “The intervention doesn’t give Japan the boost that it needs.”
Merk, whose funds eliminated their small positions in the yen shortly after the G-7 intervention, warns that large corporations or pension funds that don’t hedge their currency risk from Japan may be caught off-guard. “The intervention makes going long on the yen a risky bet,” he says.
Some see more ominous signs for Japan’s economy from the currency manipulation. “The unfortunate reality is that the Japanese government is doing more economic damage to Japan than the earthquake and tsunami did. This new round of inflation will overwhelm the ability of the Japanese economy to offset upward pressure on consumer prices,” writes Peter Schiff, the CEO and chief global strategist of Euro Pacific Capital, on Business Insider.