Lagarde Says Intervention Would Be `Purely Japanese,' Not G-7

By Sandrine Rastello and Simon Kennedy

Oct. 28 (Bloomberg) -- French Finance Minister Christine Lagarde said Japanese authorities may sell the yen for the first time since 2004 after the currency surged to its strongest in almost 13 years.

Speaking hours after the Group of Seven nations warned against the yen's ``excessive volatility,'' Lagarde foreshadowed a ``purely Japanese'' intervention to weaken it, saying in an interview that the G-7 had no plans to help.

That leaves investors testing Japan's resolve as the yen's advance threatens to erode the earnings of exporters such as Canon Inc. and pushes stocks to a 26-year low.

``Lagarde has weakened the force of the G-7's statement,'' said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. ``It still suggests the Japanese wanted permission to intervene so it provides some approval for going ahead with unilateral action.''

The global credit crunch is forcing investors to race from risk, prompting them to repay loans they previously took out in Japan to take advantage of the lowest interest rates in the industrial world. As a result, the yen has climbed 14 percent against the dollar this month and almost 30 percent versus the euro. The yen yesterday advanced 1 percent to 93.36 per dollar at 11 a.m. in New York, from 94.32 on Oct. 24, when it touched 90.93, the strongest since 1995.

Market Volatility

The yen's surge is also generating volatility in foreign exchange markets with a JPMorgan Chase & Co. index showing the major currencies whipsawing the most in at least 16 years. The G-7 yesterday issued an unscheduled and rare statement of concern ``about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability.''

In the interview in Montpellier, Lagarde said the statement came at the initiative of Japan and was aimed at showing G-7 support for the ``possible intervention of Japanese authorities, knowing this would be about a purely Japanese intervention.'' Asked specifically if the G-7 nations would together sell the yen, she said ``no.''

Even without the support of counterparts, Japanese authorities may still act alone as they last did in March 2004, when they sold the yen at 103.52 per dollar. Vice Finance Minister Kazuyuki Sugimoto said yesterday that the government was prepared to act ``quickly'' in the currency market.

Testing Yen

``It is mostly up to the Bank of Japan to act,'' said Roberto Mialich, Milan-based currency strategist at UniCredit MIB. ``There is a risk that the markets are being pushed to test the sustainability of the yen.''

The G-7 nations comprise the U.S., Japan, France, Germany, Italy, the U.K. and Canada. They haven't intervened together in currency markets since September 2000, when they sought to buoy the euro after it fell as low as 82.30 U.S. cents.

A study published this month by European Central Bank economist Marcel Fratzscher found the G-7's currency statements since 1975 proved most effective when followed by action such as the 1985 Plaza Accord to weaken the dollar and the Louvre Accord of two years later to boost it.

The governments and central banks don't always back their talk with action. The last time the G-7 singled out an appreciating yen for criticism was in January 2000 and that wasn't followed by intervention. It also didn't act this year when the dollar fell to its lowest in trade-weighted terms since Richard Nixon decoupled it from gold in 1971, a drop that prompted the group to warn against ``sharp fluctuations'' in April.

Selling Dollars

Eisuke Sakakibara, Japan's top currency official from 1997 to 1999, said yesterday that the statement may have been all Japan was able to secure from its G-7 colleagues. The U.S. is wary of selling dollars as it relies on foreign capital to support its own markets, while intervening would also undermine the G-7's five-year lobbying of China to stop managing its currency, economists said.

Japan ``got the minimum,'' said Sakakibara, currently a professor at Waseda University in Tokyo. If the G-7 ``were to intervene, they'd do it without making a statement.''

Even if the Bank of Japan does seek to sell its currency, the ``chances of success are weak at best'' as the credit crunch stops the Japanese from investing abroad and prompts them to repatriate their money, said Ashraf Laidi, chief currency strategist at CMC Markets in New York.

Turner at ING predicted financial markets would retest the yen's 1995 low of 80 per dollar as central banks such as the Federal Reserve and European Central Bank keep cutting interest rates. The Bank of Japan has less room to do so with its benchmark at 0.5 percent, the lowest in the industrial world.

``Even if intervention were to occur this week, we very much doubt it will reverse recent exchange-rate trends,'' Turner said.

To contact the reporter on this story: Sandrine Rastello in Montpellier, France, at srastello@bloomberg.netSimon Kennedy in Paris at Skennedy4@bloomberg.net