By Howard Schneider and Neil Irwin
Friday, March 18, 2011; 9:50 AM
The United States and other major industrialized nations joined in a rare coordinated currency intervention on Friday to keep the Japanese yen from rising too sharply in value in the wake of the country's recent natural disasters, a sign of the deep global concern about the health of the world's third-largest economy.
The Nikkei gained 2.7 percent after the announcement, making up for some of the 12 percent losses since the earthquake, and the yen fell 3.6 percent against the dollar, the biggest fall in two years.
The Bank of Japan began the effort with the European Central Bank, Bank of England, Bank of France, Germany's Bundesbank and the Italian central bank joining in the effort when their markets opened, according to Bloomberg News.
After a conference call on Thursday evening, finance ministers of the Group of Seven industrialized nations pledged "solidarity" with Japan and said that a recent run-up in the value of the yen led them to decide on a "concerted intervention in exchange markets" to try to stabilize the value of the currency.
The yen touched a historic high of about 76 to the dollar this week as markets anticipated a rush of money into the country to fund reconstruction, insurance payments and other needs following the earthquake, tsunami and lingering crisis over the state of several nuclear reactors. The rise in the value of the yen is of concern because an expensive currency might undercut the country's export industries and make it more difficult for Japan to avoid a return to recession.
No target rate for the yen was given, and it is not clear how aggressive the participating countries will have to become to prevent it from rising in value or to bring it back in line with pre-crisis levels. The fact that the United States, the United Kingdom, Canada and the European Central Bank are ready to sell or buy yen as needed may be enough to change market dynamics. The statement is also important because it gives the Bank of Japan a freer hand to intervene on its own, without worrying that its moves might be criticized as part of a "currency war."
The United States and other major economic powers typically argue for free-floating exchange rates - and have particularly criticized China for controlling the value of its currency to support its export industries. However, there was clear concern in the G-7 statement that the recent sharp movements in the yen's value could have unintended consequences for a world economy that is still mending from the recent financial crisis and recession. The last time a similar action took place was more than a decade ago, when efforts were made to support the value of the recently introduced euro.
"Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," said a statement released by the group. The statement said that Japan had requested the assistance.
"We will monitor exchange markets closely and will cooperate as appropriate."
On Thursday, the stock market rose in the United States and much of the world, offering a day of relative calm in a week roiled by calamitous developments in Japan.
Investors were partly reassured by news that the Japanese were making modest progress toward getting a cooling system at a key nuclear plant to work. And the markets were buoyed by encouraging data on the U.S. economy and a favorable outlook for FedEx Corp., which analysts consider a bellwether company.
But even as markets offered a breather in a week of volatility, analysts said the outlook for the world economy and the financial markets remains highly unclear amid turmoil in the Middle East and devastation in Japan.
"At the margin, there was a little bit of optimism today," said Bruce McCain, chief investment strategist for Key Private Bank. "But right now the uncertainty looks like it will be with us for a while."
Throughout the week, global stock markets and other risky assets have zigged on promising reports about efforts to contain the nuclear danger and zagged on setbacks. World stock markets have become a barometer of investors' confidence in the abilities of Japanese authorities to prevent a catastrophic nuclear meltdown.
Thursday was mainly a day of zigs. The U.S. stock market closed up 1.3 percent for the day, and major European markets rose by more than 2 percent.
The Labor Department, meanwhile, offered an upbeat report on the U.S. labor market, saying that the number of people filing new claims for unemployment insurance benefits fell to 385,000 last week, from a revised 401,000 the previous week.
Also Thursday, the Federal Reserve Bank of Philadelphia reported that its index of manufacturing activity was the highest it has been since 1984. The index, which is based on a survey of manufacturers in Delaware and parts of Pennsylvania and New Jersey, rose to 43.4 in March, from 35.9 in February, indicating a strong expansion of manufacturing in that region.
But there was also some disappointing U.S. economic news. Industrial production was weaker than forecast in February. The Federal Reserve reported that output decreased 0.1 percent last month, much worse than the 0.6 percent gain forecasters had expected. That decline, however, was attributed to a 4.5 percent drop in output by utilities, reflecting warmer-than-usual February weather. Manufacturing output rose a steady 0.4 percent.