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G7 fires warning shot on yen surge

  The Group of Seven warned the surging yen posed a threat to financial and economic stability on Monday in the latest coordinated effort by the world’s richest nations to contain worst financial crisis in 80 years.

 

The yen was the only currency mentioned in a brief G7 statement issued as it rallied to 13-year high against the dollar, threatening Japanese exports as world’s second-largest economy tumbles toward recession.

With Tokyo’s Nikkei share average hitting a 26-year low and share of Japan’s biggest banks tumbling on fears that they would have replenish capital, Finance Minister Shoichi Nakagawa said the G7 was worried about volatility in the yen. “We continue to monitor markets closely and cooperate as appropriate,” Nakagawa said, reading from the G7 statement.

South Korea resorted to a record interest rate cut and Australia’s central bank said it had intervened to support its currency in another sign that policymakers are reaching beyond troubled banks now that the financial crisis has shattered investor confidence, and threatens jobs and corporate sales.

Japanese Prime Minister Taro Aso asked ministers to consider emergency measures to stabilize the stock market, including government purchases of shares and relaxing rules on recapitalization of banks. Three banks were looking to raise cash to offset stock market losses, Japanese media reported.

The Nikkei clawed 0.7% higher but Asia-Pacific shares outside of Japan fell 2.6% to a four-year low, according to an MSCI index. Safer assets such as government bonds and gold traded higher on the day, suggesting investors would need to see more than just rhetoric before acting. “Whether what we’re seeing right now from policymakers is sufficient is difficult to tell. The price action alone in markets tells me not,” said Dwyfor Evans, currency strategist with State Street Global Markets in Hong Kong.

Developing nations have been turning to the International Monetary Fund for help to stave off the worst global financial crisis since the Great Depression in the 1930s. Hungary had reached an agreement to get a “substantial financing package” in the next few days that will include financing by the European Union and some individual European governments, the IMF said. The IMF agreed on a $16.5 billion loan package for Ukraine on Sunday.

 

STERNEST TEST

South Korean policymakers took their most dramatic measures yet in a months long battle to buttress confidence in an economy facing its sternest test since the Asian financial crisis a decade ago.

The Bank of Korea cut its main interest rate by 75 basis points to 4.25% in an unscheduled meeting. The rate cut was the biggest on record and only the second emergency move since the bank adopted its current monetary policy system; the first was after the September 11, 2001 attacks on the United States. “Their priority is to minimize the impact of the crisis on growth and on volatility. Eventually this could also help the markets,” said Sebastien Barbe, senior economist and foreign exchange strategist with Calyon in Hong Kong.

President Lee Myung-bak pledged to increase government spending and to cut taxes to support Asia’s fourth largest economy, which grew at the slowest quarterly pace in four years during the last quarter. The Bank of Korea also cut rates earlier this month after major central banks including the Federal Reserve, the European Central Bank and the Bank of England delivered an unprecedented coordinated rate cut to halt the dizzying slide in markets.

The US Federal Reserve is widely expected to announce a 50 basis-point cut in overnight rates on Wednesday that would take its benchmark to 1%, the lowest since June 2004. Some analysts expect a reduction to 0.75%. US economic growth is buckling under the impact of the crisis triggered last year by a meltdown in the US mortgage market. Advance third-quarter US economic growth data due on Thursday is expected to show a 0.5% contraction in gross domestic product after 2.8% growth the previous quarter.

Most industrialized nations appear headed for recession and the picture looks set to darken after a series of profit warnings major international companies last week, including Japan’s consumer electronics maker Sony, French carmaker PSA Peugeot Citroen and online retailer Amazon.com.

 

GOVERNMENTS REACH INTO MARKETS

In Japan, the world’s second largest economy, the stakes rose as the country’s largest banks began showing signs of stress. Shares of Mitsubishi UFJ Financial Group and other big Japanese banks tumbled more than 10% on Monday, hit by concern they may need to raise billions of dollars each to replenish capital lost in the stock market slump.

Although Japanese banks have so far avoided the credit losses that tore through Wall Street, they have been hit hard by the volatile domestic stock market and weakening economy. The Nikkei is down 22% so far this month. Mitsubishi UFJ, Japan’s top lender, is considering raising up to ¥1 trillion ($10.8 billion) to shore up its capital, people familiar with the matter have said. Mizuho Financial Group, Japan’s second-largest bank, and third-ranked Sumitomo Mitsui Financial Group, are both looking to raise as much as ¥500 billion ($5.4 billion), newspapers reported on Monday.

And Japanese exporters, already facing their toughest markets in decades, fear a surging yen may pummel demand for their products. The yen climbed back near a 13-year peak against the dollar on Monday, with Japanese investors continuing to bail out of overseas currencies and bring the money home. Japan has not intervened in currency markets since 2004.

Australia’s central bank stepped into the foreign exchange market to support its plummeting currency on Friday, the Reserve Bank of Australia said on Monday, The Aussie slid to five-year lows against the US dollar and its deepest-ever trough against the yen. The last time the RBA moved to shore up the currency was in August 2007, when the melt-down in US subprime mortgages first exploded into a global credit crisis. The Australian dollar was up more than 1% to $0.6240, but has dropped 29% so far this year. (Reuters)