Currency analysts firmly expect the Bank of Japan to decide on a significant easing in monetary policy at its council meeting today. It has come under severe pressure from Japanese politicians because such a move is seen as a pre-condition for other G7 countries to intervene in the markets to hold down the yen.
Japan has sold about $35bn-worth of yen on nine occasions since 10 June, but the Bank of Japan has so far "sterilised" these sales, offsetting them in the domestic money markets. A decision to halt this sterilisation could herald a G7 deal at the meeting in Washington on Saturday.
The dramatic climb in the Japanese currency, especially against the dollar, has raised fears that its strength could derail the economic recovery. The dollar fell to a near four-year low of 103.20 earlier this month, although it has regained some ground in recent days as speculation about a shift in policy has mounted.
The strong yen problem has been given greater urgency by the approach of 30 September, the end of the half year for many Japanese investment institutions.
The 16 per cent rise in the yen will have caused them paper losses of about $360bn - 7 per cent of Japanese gross domestic product (GDP) - by the time they square their books, according to Carl Weinberg, chief economist at High Frequency Economics. He predicted the prospect of such huge losses would tip the debate within the Bank of Japan.
"Currency market intervention is futile unless other changes are implemented at the same time to support the move," he said.
US and Japanese officials have held several meetings in the run-up to next weekend's G7 session.
The last time the G7 tried - and succeeded - to turn around the currency markets was April 1995. After that episode of intervention the dollar climbed from a postwar low of 82.66, peaking at 146.31 in August 1998. The dollar remained steady at just above 106 yesterday.
The G7 is also due to consider the economic situation in two hotspots, Russia and Indonesia, at Saturday's meeting.
Both countries have borrowed extensively from the IMF and, in both cases, there are grave concerns about possible fraud.
A report issued yesterday by the UN Conference on Trade and Development warned that the economic crisis in Asia was not over. The gloomy warning came on the eve of publication by the IMF of considerably more upbeat forecasts for the world economy.
The violence in East Timor and the potential need for aid for peacekeeping and reconstruction will also be discussed.
The latest humanitarian emergency follows in the wake of a string of disasters, human and natural, including Hurricane Mitch and Kosovo.Reuse content