On Wednesday it emerged that the US had spent around $2bn (pounds 1.2bn) buying yen in an attempt to halt the currency's slide against the dollar, the first such move for six years. Yesterday, the dollar slipped by almost 3 per cent to 133.87 yen, the dollar's lowest level for more than a month.
All eyes will now be on the weekend's G7 meeting in Tokyo, where Japan is expected to announce key structural reforms. Avinash Persaud, global foreign exchange strategist at JP Morgan, said: "The market believes there was a bargain made between the US Federal Reserve and Japan that the US Treasury would intervene in the markets if Japan announced meaningful reforms at the G7 meeting."
Lawrence Summers, US Deputy Treasury Secretary, has had a series of crisis meetings with Japanese officials in Tokyo. Yesterday he was said to have won a promise from the Japanese government that it would come up with a detailed plan to resolve its bad loan crisis before 12 July.
In a briefing Stephen Lewis, chief economist at Monument Derivatives, said: "Early reports suggest that, whereas under the old accounting rules, Japan's banks appeared to have provided against 80 per cent of their bad loans, under new loan classifications the provisions amount to as little as 17 per cent of what is needed."
Mr Lewis said the G7 meeting could be a "make-or-break test of the new world economic order". He predicted: "If the G7 fail to endorse a credible plan from the Japanese government, global financial relations could begin to unravel in a manner which will threaten, at the very least, a prolonged depression in one-third of the world's economy. If, on the other hand, the meeting is successful, capital flows into what are perceived as safe assets are likely to reverse as investors regain their appetite for risk."
Japan is expected to unveil reforms to its banking system at the weekend, although some experts were yesterday predicting that these reforms would be unable to reverse the yen's slide against the dollar over the longer term.
Mr Persaud was among the sceptics. He said: "While these reforms are probably desirable and necessary, they do absolutely nothing to alter the fundamental dynamic that is driving the yen down." The yen will only reassert itself over the longer term if US interest rates are cut and Japanese rates are raised, Mr Persaud said, an unlikely scenario in the current climate.Reuse content