G7’s hint on yen fail to impress markets

02/12/2007

By David Pilling in Tokyo, Bertrand Benoit in Berlin and Chris Giles in London
Financial Times

Published: February 12 2007 18:14 | Last updated: February 12 2007 18:14

Nods and winks about the risk of a sudden rise in the yen that were the order of the day at the weekend’s Group of Seven meeting in Essen in Germany failed to achieve the desired effect, just as they had done at the previous meeting in Singapore last September.

G7 ministers and central bank governors stressed the risk of “one-way bets” for currency traders in remarks interpreted by Koji Omi, the Japanese finance minister, as referring to the carry trade, in which investors borrow in yen to invest in higher-yielding assets abroad.

But talk failed to impress currency traders, who pushed the yen lower once the risk that the G7 would act had passed. The yen has fallen to 20-year lows in real terms against major currencies in spite of the fact that Japan is enjoying its longest – though far from most robust – post-war recovery.

The market movements on Monday are a cause for concern for many continental European countries. France, whose industry’s competitiveness in export markets has lost out to Germany, has been particularly worried about the support the low yen is giving Japanese manufacturers.

Aides to Peer Steinbrück, German finance minister, said at the G7 meeting that he too had received anxious calls from German carmakers, implying that the level of the yen was also a concern in Berlin.

But failure to mention the yen specifically, as some European ministers had wanted, took pressure off the currency. Following US and Japanese opposition, there was no specific call for Japan to raise interest rates from their lowly 0.25 per cent, or to buy yen.

London-based Capital Economics said the yen was fulfilling the G7’s requirement of trading according to market fundamentals. “The value of the yen is doing just that. The main reason for the recent weakness has been the disappointing economic data from Japan.”

A weak third quarter, in which domestic consumption was disappointing, has persuaded the Bank of Japan that it is too early to raise interest rates. These have been stuck at 0.25 per cent for six months, resulting in a 5-percentage point gap with UK rates. But the picture could change as early as this Thursday when fourth-quarter gross domestic product data are expected to show the economy back on track. Economists are predicting annualised growth of 3.5 to 4 per cent, rallying from the disappointing 0.8 per cent of the previous quarter.

A strong GDP outcome could persuade the BoJ to raise rates to 0.5 per cent when it meets later this month, a move that might mark a watershed for the carry trade. But futures markets and many economists are far from convinced that the central bank will move even if fourth-quarter growth is strong. And even if the BoJ raises rates, there is no guarantee the yen would follow suit.