March 17, 2011 / 10:59 IST
The yen surged to a record high against the dollar on expectations that Japanese insurers would need to repatriate the currency in the wake of the devastating earthquake and tsunami that killed thousands in northeast Japan.
Key points: The yen hit a record high of 76.25 to the dollar on electronic trading platform EBS in chaotic trading, although in morning trade in Japan it had pulled back to about 79.55.A senior Japanese government official said G7 finance ministers would hold a teleconference this week on issues including the Japanese disasters and foreign exchange rates.Finance Minister Yoshihiko Noda said speculation was behind the foreign exchange market moves and he would be watching foreign exchange moves closely, although he declined to comment on currency intervention.Economics Minister Kaoru Yosano said the yen's rise was speculative, not driven by repatriation of funds by insurers, which he said needed less than 500 billion yen (USD 6 billion) to pay for damage from the quake. He added that the market appeared to have stabilised following the yen's spike."The yen's surge is definitely negative for Japanese exporters like Toyota, but many investors are expecting joint currency intervention and that the current spike in the yen is speculative. But even so, nothing is certain and that's why institutional investors are mostly sitting and just monitoring the situation. But the tide could change any minute if we see developments at the nuclear power plant," says Teruhisa Ishikawa, equities information manager, Mizuho investors securities. Jun Ishii, Chief Fixed Income Strategist, Mitsubishi UFJ Morgan Stanley Securities says, "this is positive for JGBs in theory as a strong yen hurts the economy. Repatriated yen will also find their way into safe-haven government debt. But at the same time the drop in stocks caused by the yen surge will hurt investors' balance sheets ahead of the fiscal year-end (on March 31). Even safe-haven JGBs may not be immune to selling by investors who may need to make up for losses suffered on other assets.""The spike in the yen occurred at a time when low market liquidity is a bottleneck. It is similar to what happened with a plunge in Tokyo shares earlier this week, and I expect the market to crawl back to 80 yen. The move may have been related to foreign banks needing yen for their settlements and finding limited supply, but even so, the move is excessive. The repatriation rumour also appears to be overblown. There are two ways to counter this: for the Japanese government to intervene in the market, or for the BOJ to supply ample yen to the markets through swap agreements with other central banks to respond to the needs of foreign banks, which don't have direct access to yen funding in the Japanese money markets where the BOJ has been pumping in huge amounts of funds. Over the longer term, the slump in production will hit exports, leading to a shrinking trade surplus. For reconstruction, Japan will need to import raw materials and the yen's strength may be beneficial in this aspect," says Ayako Sera, Market Strategist, Sumitomo Trust & BankingJapan is battling to prevent a nuclear catastrophe and to care for thousands of people without power or water in its worst crisis since World War Two, after a massive earthquake and tsunami that are feared to have killed more than 10,000 people.The Bank of Japan on Thursday offered to inject a further 5 trillion yen into the banking system to calm markets, on top of a total of 28 trillion yen already offered in same-day operations this week in the aftermath of the earthquake.
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