World's central banks act to halt rise of yen in bid to calm markets

Concerted action by the major central banks pushed the yen down from its post-earthquake high point yesterday as the Group of Seven rich nations carried out their first co-ordinated intervention in the currency markets in over a decade.

The US Federal Reserve, Bank of Canada and European central banks joined the Bank of Japan in a massive sale of the currency after the G7 agreed on the joint effort to reverse recent sharp yen gains and calm world markets.

The yen was driven to a post-war high against the dollar following last Friday's disaster because traders anticipated that Japanese corporations would seek to sell assets held abroad to pay for reconstruction. A similar effect was observed after the Kobe earthquake of 1995.

The high yen in turn damages Japanese companies' ability to export by making their products more expensive abroad, hitting a key component of its economy.

In response to the action, the dollar rose as high as 82 in early European trading yesterday and settled around 81.15 in New York, up about 3 per cent on the day. The dollar had hit a low just above 76 earlier in the week.

Market estimates had the Bank of Japan alone selling some 2 trillion (15 billion) over the course of the day.

Michael Woolfolk, senior strategist at BNY Mellon in New York, said he did not think traders would be able to fight the G7's action.

He said: "It's evident this is not just a one-day event. The G7 has made an extended commitment that we think will stretch over a number of weeks, and we think it will be successful."

Analysts said central bank determination would help counter repatriation flows from Japanese retail and corporate investors, who are expected to bring money home to pay for rebuilding after last week's earthquake and tsunami.

The first G7 joint intervention since 2000 capped a frantic week for Japanese markets that saw the Nikkei suffer its worst two-day rout since the 1987 crash.

The effect of the G7 decision was immediate as the Nikkei 225 index re-gained 2.7 per cent yesterday to close at 9,206.75.Japanese markets had already reversed some of their losses from Monday and Tuesday's frantic selling even before the intervention, despite ongoing worries about the situation at the stricken Fukushima Daiichi nuclear power plant.

Other markets around the world responded positively, including London.

The G7's action came as more effects of the Japanese catastrophe on the global economy surfaced.

The International Air Transport Association said commercial air travel to Japan would suffer a major slowdown in the short term due to the earthquake and tsunami, and that a recovery will depend on how the nuclear crisis unfolds.

It said the markets of China, Taiwan, and South Korea are most exposed to a drop in Japanese traffic, with at least a fifth of their revenue coming from the country.

The trade group added that Japan produces 3 to 4 per cent of global jet fuel supplies and prices could rise because some refineries were damaged.

It said most Japanese airports have enough fuel to last another ten days.