G-7 Fails to Halt Yen's Gain, Says Moves `Excessive'

By Jason Clenfield and Keiko Ujikane

Oct. 27 (Bloomberg) -- The Group of Seven industrialized nations failed to halt the yen's advance to near a 13-year high against the dollar after expressing concern about the currency's ``excessive volatility.''

The G-7 made an unscheduled statement after a request from Japan, Finance Minister Shoichi Nakagawa said in Tokyo today, adding that his government was ready to act if needed. The G-7 fell short of pledging concerted action to halt the yen's gain.

``Issuing such a statement is a sign of failure to intervene,'' said Eisuke Sakakibara, a professor at Tokyo's Waseda University who was the Finance Ministry's top currency official from 1997 to 1999. ``The Japanese government may have consulted with their counterparts in the EU and the U.S. and they couldn't persuade them to intervene.''

Japan's Nikkei 225 Stock Average slid 6.4 percent today to a 26-year low as the soaring yen eroded earnings of exporters such as Canon Inc. The currency has gained as the risk of a global recession and a slump in global stock markets prompted investors to sell assets bought by borrowing in Japan, where interest rates are the lowest among industrial nations.

``We reaffirm our shared interest in a strong and stable international financial system,'' the G-7 statement said. ``We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.''

Yen Gains

The yen rose to 92.68 per dollar as of 8:22 a.m. in Tokyo from 94.32 late Oct. 24. Japan's currency has climbed 14 percent against the dollar this month and 30 percent versus the euro.

Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London, said the statement was the first he could remember on exchange rates outside of the G-7's regular meetings. ``This only serves to highlight the importance of the warning both as a statement of immediate intent and as a broader indication of the longer-term shift in thinking within the G-7.''

``It seems one more piece of evidence than the pendulum is swinging back towards a pre-1996 world where the G-7 took a more activist stance in the currency markets,'' said Mellor.

Japan indicated it may take action to halt the yen's advance, when Vice Finance Minister Kazuyuki Sugimoto said the government was prepared to act ``quickly'' in the currency market.

Tacit Consent

``If the G-7 didn't want Japan to intervene they wouldn't have signed a joint statement,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``They were saying: `If Japan needs to intervene for its own sake, we won't get in the way.'''

Volatility on major currencies touched 24.27 today, according to a JPMorgan Chase & Co. index, the highest since its inception in 1992.

Governments worldwide are taking action to limit big swings in currencies and stocks, and to buoy economic growth.

Australia's central bank bought the country's currency for a second day to arrest a 35 percent drop in the past three months and the Hong Kong Monetary Authority added cash to the banking system to prevent the city's dollar from strengthening beyond its fixed exchange rate. In South Korea, the central bank slashed interest rates by a record 75 basis points to 4.25 percent at an emergency board meeting.

Belgium Acts

Belgium said today it would buy 3.5 billion euros ($4.4 billion) of securities in KBC Group NV to help strengthen the financial position of the country's biggest bank.

Japan, the yen's gain is already taking its toll on company profits. Canon, Japan's largest office-equipment maker, reported today third-quarter profit fell 21 percent as the surging currency undermined overseas revenue.

A study published this month by Marcel Fratzscher, an economist at the European Central Bank, of reaction to the group's statements since 1975 found that it is most successful when viewed as credible by investors and its message is supported by every official and repeated in the weeks after the meeting.

The statements also wield power if the governments and central banks back up their words with intervention in the markets, the study said.

Aso's Plans

Japan hasn't sold its currency since March 2004 when the yen was trading at 103.42 against the dollar. The Bank of Japan, acting on behalf of the Ministry of Finance, sold 14.8 trillion yen ($157 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.

Separately Japan's Prime Minister Taro Aso said he'd draft measures to help counter the financial crisis.

The proposals Japan's government is considering include a resumption of state purchases of shares owned by Japan's banks, said Hakuo Yanagisawa, a ruling Liberal Democratic Party lawmaker charged with dealing with the financial crisis. The decline in the stock market has eroded the value of shares banks hold as part of their capital.

Japanese banks tumbled on the Tokyo Stock Exchange today after media reports said they may seek to raise extra capital to offset unrealized losses on shareholdings. Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. sank more than 10 percent.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.netJason Clenfield in Tokyo at jclenfield@bloomberg.net