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The 'sell the yen' effort means well, but will it succeed?

After all the poor Japanese had been through in the previous week, surely the last thing they needed was an attack on their currency by the world's leading economic powers? But in the topsy-turvy world of global finance, it all makes sense.

The stoicism of the Japanese has been much praised, deservedly, since the awful earthquake struck on March 11, but nothing typified it for me as much as one of the thousands of amateur video clips that went on the web in the days after the catastrophe.

It showed a large fishing vessel sailing almost serenely down a high street, past shops and houses, until it crashed into a road bridge and began to disintegrate.

If this had happened in the US or most other parts of the world, you can guarantee the cameraman would have been screaming uncontrollably: "Oh my God! What on earth? Just look at that!", etc.

The Japanese video operator watched the scene in silence, until the boat hit the bridge, and then let loose the soft, nasal, whirring-cooing sound that denotes surprise in many parts of east Asia. It's almost impossible to represent in Roman letters.

I think that kind of understated refusal to panic would have been a more appropriate response than the actions of the Bank of Japan and other central banks of the G7 group of developed countries that followed the further unfolding of the Japanese tragedy.

Last Friday, Tokyo, with co-ordinated help from Washington, Frankfurt and London, embarked on a selling spree of the Japanese yen almost unprecedented in the history of foreign exchange markets. In one day, those central banks sold yen to the value of about US$25 billion (Dh91.82bn).

I had to do a second take when I saw the headline. They "sold" yen? After all the poor Japanese had been through in the previous week, surely the last thing they needed was an attack on their currency by the world's leading economic powers?

But in the topsy-turvy world of global finance, it all makes sense.

Japan lives on its exporting efficiency. A strong currency would have made its products much more expensive to sell abroad, which in turn would have made it harder to export its way out of the economic disaster following on the heels of natural and nuclear crises.

In normal circumstances, the Japanese catastrophe would have been expected to weaken the currency, but again nothing is normal in the foreign exchange markets. A couple of days after the full extent of the damage wrought by the earthquake became apparent, the word went round the forex dealing rooms of the world: buy yen.

The argument was that Japanese insurance companies and industrial companies with big overseas operations would have to repatriate funds to deal with the financial liabilities of meeting claims and beginning to rebuild. They would have to buy yen to do so, hence a likely spike in the currency's value.

The market seemed to bear out this argument. In less than a week, the yen appreciated by 10 per cent against the dollar and the euro. It is impossible to say how much of this was down to the actions of those who repatriated funds, and how much down to what a Japanese banking official described as "sneaky thieves" - the speculators who are part and parcel of the international forex markets.

But much as in Germany last year, when speculators (hedge funds, in that case) were described as "locusts", the accusation that the appreciation of the yen was caused by speculators hit home in Tokyo and, judging by the huge intervention, in the other G7 capitals as well.

I don't want to get into another round of arguments for and against speculators. I've said in this column before they are a much-maligned class of traders who, for all their sins in amplifying trends in global markets, perform a valuable service in providing essential liquidity.

What is much easier to demonstrate is that immense interventions by governments in financial markets often do not work, and equally often have the opposite macroeconomic effect of that intended.

The "Plaza Accord" of 1985 was designed to drive down the value of the dollar but was so effective that its architects had to replace it with the "Louvre Accord" of 1987, which reversed the policy.

The British government's efforts to defend sterling on "Black Wednesday" in 1992 was a financial disaster that cost the Bank of England billions for no benefit.

A decade ago, the G7 intervened to support the euro in its infancy when it looked as though the new currency would be hammered into the ground, but that did not prevent last year's euro-zone crisis, the effects of which haunt us still.

Will the "sell the yen" campaign have similarly unintended effects? Of course, it's too early to tell, but such an immense knee-jerk interference in the forex markets seems to be tempting fate.

Perhaps the more appropriate reaction by the central bankers would have been a decent pause to see where it all settled.



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