The yen climbed towards an all-time high against the Australian dollar on Monday as investors kept dumping risky positions and drove Tokyo shares to a 26-year low, overshadowing a G7 warning about excessive yen volatility. Group of Seven finance ministers and central bank governors singled out the excessive volatility of the yen and said they were concerned about its implications for economic and financial stability, adding that they will monitor markets closely.
Analysts said the G7 statement suggested authorities were getting closer to the point where they would consider intervention, possibly jointly, to stem the yen's gains from market players unwinding carry trades en masse.
The yen has struck a 13-year peak against the dollar, a six-year peak against the euro and many other milestones in its roughly 20 percent surge on a trade-weighted basis this month. The Australian dollar's plunge prompted the country's central bank to intervene on Friday to provide liquidity and help prop up the battered currency, stirring speculation that more authorities will step in. "If the dollar falls below 90 yen, financial authorities are likely to intervene in the forex market," said Masafumi Yamamoto, head of FX strategy for Japan at Royal Bank of Scotland.
"A dollar drop below 90 yen could accelerate the yen's rise, having a bad impact on share prices." Some traders said Japan was more likely to go it alone on such intervention than with others such as European countries, which may prefer a weaker euro to soften the blow of a recession. Japan last intervened in March 2004 to stem yen strength.
"While Japan may launch intervention alone, it is not likely to have a lasting impact on the forex market," said Minoru Shiori, chief manager of forex trading at Mitsubishi UFJ Securities. Earlier in the day Japanese Finance Minister Shoichi Nakagawa said he was watching currencies with "great interest" - an indication the ministry is on a heightened state of alert when it comes to potential intervention.
Carry trades - using the low-yielding yen to buy everything from higher-yielding currencies to stocks and commodities - have collapsed in the past few weeks as market players have been forced to sell many assets to raise cash.
The Aussie - the carry trade favourite until just a few months ago as commodities soared - has lost almost a third of its value in October. Currency moves remained large because few market players were bold enough to take the other side of trades.
The dollar fell 1 percent from late US trade last week to 93.29 yen pulling back after rising to near 94.50 yen after the G7 warning. On Friday the US currency slid to a 13-year low of 90.87 yen on trading platform EBS during the yen's panicky surge.
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