The decision by G7 finance ministers to make a rare co-ordinated intervention in the foreign exchange markets paid off yesterday, as the value of crisis-hit Japan's currency fell and tensions on stock exchanges around the world eased.
The intervention, agreed in the early hours of yesterday morning following talks between countries including Japan, the UK and the US, saw central banks begin large-scale sales of their yen holdings.
The aim was to force down the value of the yen, which earlier this week hit its highest level against the dollar since the Second World War – at the worst moment imaginable for Japaneseexporters as they struggle to bounce back from the devastation caused by last week's earthquake and tsunami.
The G7 finance ministers said: "We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed co-operation and our confidence in theresilience of the Japanese economy and financial sector."
The G7's move appeared to pay off yesterday, with the value of the yen falling by between 2.5 and 3.5 per cent against major world currencies including the dollar, the euro and the pound.
That in turn buoyed the Japanese stock market, which had shed almost 13 per cent of its value in the first four days of the week. Yesterday the Nikkei 225 Index rose by 244 points or 2.7 per cent, to begin recovering some of those losses. Western shares also posted gains, with European indices up by around 0.5 per cent. The US market was up in early trading too, with the Dow Jones index rising 1 per cent during the morning in the US.
Despite the initial success of thecurrency strategy, however, foreignexchange specialists warned that the interventions might have to continue for some time in order to prevent the yen rising once more amid expectations that Japanese savers and institutions will repatriate money held overseas as they respond to the crisis caused by last week's quake.
"[The intervention] would need to be concerted and aggressive – and even then I'm sceptical," said Richard Wiltshire, a currency trader at RTX Capital. Kathy Lien, director of currency research at GFT, added: "The only type of intervention that works is co-ordinated intervention."
The Japanese government alsobelieves it has been the target of opportunistic speculators. Fumihiko Igarashi, the deputy finance minister, said the G7 talks had agreed that such speculators were putting the global economic recovery at risk. "We will take decisive steps against speculators who act like sneaky thieves at the scene of a fire," he said.
The G7's willingness to wade into currency markets for the first time since 2000 also reflects nervousness about the way in which the fraught situation in Libya and other parts of the Middle East is translating into additional financial volatility.
There is particular concern about the oil price, which has been rising steadily since the beginning of the year. The UN resolution threatening the Libyan government with military intervention, agreed on Thursday night, prompted prices to spike even higher yesterday morning, though the subsequent declaration of an official ceasefire reassured oil traders. The price of a barrel of oil rose above $117 early in the day before falling back to $114.
Other commodities also saw further price rises, with gold moving back near to its all-time high, closing up 1.2 per cent at $1,420 an ounce.