Yen and yuan slide still further after G7's refusal to talk tough

The currencies of Japan and China resumed their slide on foreign exchanges yesterday as a lack of tough talk at the weekend's G7 meeting gave traders the green light to carry on selling.

The sell-off came as official figures showed China's trade surplus has ballooned by 67 per cent over the past year, a development that is likely to pile more pressure on Beijing to relax its iron grip on its currency.

The Japanese yen dived to a fresh record low of ¥159 against the euro. Against the dollar it fell to ¥122.09, within a whisker of four-year troughs. China's yuan, meanwhile, weakened to 7.7570 against the dollar amid rumours that the country's central bank was buying the greenback to stop its own currency from rising.

At their meeting in the German city of Essen at the weekend, G7 finance ministers and central bank chiefs reminded investors who have been steadily selling the yen that Japan's economy was strengthening and they should be wary of one-way currency bets. But, crucially, they made no explicit mention of its weakness.

Adarsh Sinha, currency strategist at Barclays Capital, said: "I think the G7 statement itself, with the hints made about the carry trade, was probably a bit too subtle for the market's liking." The fresh bout of selling will be a blow to European policymakers, who have been complaining that the weak yen is undermining their export competitiveness and giving Japan an unfair advantage.

The yen has been weakening because of Japan's rock-bottom interest rates, currently at just 0.25 per cent. But is has also been a victim of the so-called carry trade, where investors borrow the yen at a low interest rate and then invest in higher yielding overseas assets, selling the yen for the destination currency.

Stephen Lewis, economist at Insinger de Beaufort, said the hard truth was that the yen had been weak because Japanese economic fundamentals did not look as strong as the G7 said they were. "If market participants really believed that Japan's recovery was on track, they might be less inclined to sell the yen," he said. "The problem is they do not foresee an upswing any time soon in Japanese consumer demand, and certainly not on a scale to prompt the Bank of Japan to normalise interest rates. This is what the markets will incorporate in their assessment of risks as they continue to borrow yen for switching into high-yielding assets denominated in other currencies."

Meanwhile, China exported $15.9bn (£8.2bn) more goods and services than it imported last month, up from $9.5bn a year earlier - a 67 per cent increase. On a rolling 12-month basis, the surplus rose to $183.9bn, a record high. News of the massive surplus followed renewed calls from the G7 for China to increase its currency flexibility. China only allows the yuan to trade in a very narrow range against the dollar, but has long pledged to let it trade more freely. In the meantime, by refusing to let its currency rise, China is ensuring its exports are cheaper.

Julian Jessop, chief international economist at Capital Economics, said: "The explosion of the trade surplus suggests the yuan is most certainly undervalued. But will Beijing do anything about it? Absolutely not, if they can possibly help it. The external sector has provided a big boost to economic growth."

Mr Jessop said the weak yuan posed more of a risk to global economic stability than the anaemic yen. "The yen reflects Japan's relatively weak economic performance but the yuan is being held artificially low," he said. "If the dollar weakens, the yuan will be dragged down with it, putting more pressure on floating currencies such as sterling and the euro to take the strain."