Japan bought billions of dollars to restrain a soaring yen on Friday, backed by action from European central banks as the world's richest nations moved to calm markets made nervous by Japan's nuclear crisis.
The moves are the first joint intervention in currency markets by the Group of Seven leading powers since they came to the aid of the newly-launched euro in 2000, and signal the weight of concern about the wider impact of events in Japan.
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The U.S. dollar surged two full yen to as much as 81.83 yen in response, up from a record low of 76.25 hit on Thursday, with traders estimating the Bank of Japan bought more than $25 billion.
A series of European central banks confirmed they were intervening and stock markets surged, although dealers said the initial intervention had been much smaller in scale than the Bank of Japan's and the impact in European time was more limited.
The market was bracing for moves from the Federal Reserve and Bank of Canada when U.S. markets begin trading.
"It's going to have a very huge resonating effect on the market," said Kathy Lien, director of currency research at GFT in New York.
"Because the only type of intervention that actually works is coordinated intervention and it shows the solidarity of all central banks in terms of the severity of the situation in Japan."The decision by the G7 came as a surprise to many because Tokyo had indicated it was looking only for moral support for its attempts to assuage markets rather than joint action.
Japan's Nikkei share index climbed close to 3 percent, recouping some of the week's stinging losses as Japan reeled from an earthquake, tsunami and the nuclear power plant crisis. The market's losses for the week are 10 percent.A source told Reuters the BOJ would also leave the yen it sold in the banking system rather than mopping it up, thus adding to the vast amount of liquidity it had already provided to support its domestic markets.
Central banks will often issue bonds to soak up any extra cash in the economy that results from currency intervention for fear that the additional liquidity could fuel inflation.
G7 financial leaders may be worried that a surge in yen repatriation could create a crisis of confidence in markets already struggling in the face of Europe's debt problems and the impact of unrest in the Middle East.
President Barack Obama underlined the concern in Washington by saying on Thursday the United States would do all it can to help Japan recover while playing down fears a drifting cloud of radiation could reach the U.S. West Coast.
Japan's triple disaster, unprecedented in a major developed economy, is already disrupting global manufacturing.
Makers of equipment for mobile telephones to car makers and chipmakers have warned of a squeeze on their businesses given Japan's crucial role in many supply chains that keep global commerce ticking over.
"I think the world economy is going to go right down, and it has happened at a time when financial markets are still fragile," said a G7 central banker who declined to be named.
The yen's surge this week was driven by speculation that Japanese firms would repatriate some of their huge foreign assets to help meet insurance claims and pay for reconstruction.
That added to a bullish run for the currency in past years, driven by its status as a "safe haven"
ince the 2008 financial crisis and investors' use of it as a very low-interest funding currency for more risky investments.
An even stronger yen could make it more difficult for exporters in the world's third largest economy to recover from the triple blow of last week's earthquake, tsunami and nuclear threat. The damage toll is already estimated at up to $200 billion with Japan almost certain to slip back into recession.
"The aim is obviously to support our Japanese partner, express our solidarity and obviously to halt the yen's rise," French finance minister Christine Lagarde told French radio.
"The country has suffered enough catastrophe and calamity to try to avoid, in addition, a deep economic and then financial crisis resulting from a rising currency and preventing the Japanese from exporting as they usually do."
Investors were also keeping a wary eye on events in Libya as the United Nations voted to impose a no-fly zone over the country and use all necessary measures to protect civilians. French diplomatic sources said military action could begin within hours of the Security Council vote.
Undeterred by events in Japan, China raised its required reserve rate for banks, tightening monetary policy for the third time this year and briefly weakening oil prices, which were up $2 at almost $117 a barrel on the day.
HISTORY NOT IN FAVOUR
Still, if past is prologue, even massive official selling might not restrain the yen for long.When Japan last intervened in September 2010, it sold a huge 2.1 trillion yen, equivalent then to around $25 billion, but only managed to push the dollar up from 82.85 to 85.77 yen.
The euro and sterling jumped as much as 2-3 percent against the yen after the G7 statement but they later retreated.
"The intervention needs to be concerted and aggressive ... and even then I'm sceptical," said one trader in London.
Analysts from U.S.-based Citibank said the history of G7 action suggested the moves could reverse the yen's uptrend in the long run.
"In terms of yen, the typical example of joint intervention is the Washington G7 in 1995. At the time USDJPY ended its long years downward trend and turned into an uptrend," they said.