Japan blames yen spike on speculators

TOKYO Thu Mar 17, 2011 9:33am GMT

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TOKYO (Reuters) - The Group of Seven advanced nations will hold talks later on Thursday to discuss the impact of Japan's deepening nuclear crisis, Japanese officials said, while dismissing the need for joint intervention in currency markets.

Group of Seven sources told Reuters earlier the call was about steps to calm financial markets roiled by the nuclear crisis.

Economics Minister Kaoru Yosano, however, insisted the yen and Japanese stock markets were not in a state of turmoil and that the government would like the G7 to merely provide a psychological prop to markets, rather than intervene.

The yen spiked to a record high against the dollar, while shares in Japan and elsewhere in Asia fell on Thursday after U.S. officials said the risk of a catastrophic radiation leak from an earthquake-crippled Japanese nuclear plant was rising.

The Japanese currency bolted higher amid speculation Japanese insurers would have to repatriate funds to pay for massive claims following Friday's 9.0 magnitude quake and the devastating tsunami that ravaged Japan's northeast.

The disaster and subsequent nuclear crisis have wiped hundreds of billions of dollars off global stock markets.

But Japan's Finance Minister Yoshihiko Noda, Yosano and other officials dismissed such talk about repatriation and said speculation, not fund flows, was responsible for the currency's surge, which threatens to add further pressure on the quake-hit economy.

"I don't think stock and currency markets are in a state of turmoil," Yosano said, when asked whether the G7 advanced nations should jointly intervene in the currency market to stem yen rises.

"We would like to get psychological support from the G7," he told Reuters in an interview on Thursday.

Noda confirmed the G7 was holding a teleconference at 6 p.m. ET on Thursday and said Japan would explain to the group the damages from the quake and the situation in financial markets.

He declined to comment on a possibility of currency market intervention to weaken the yen, but markets interpret reminders about monitoring currency moves as a warning that the authorities could step in if they thought the yen was moving too rapidly.

"Market moves have been nervous amid speculation while trade has been thin," Noda told reporters. "I will be closely watching market moves today.

While government officials were stepping up their verbal intervention, the Bank of Japan continued to pump massive amounts of cash into the money market to make sure it would not seize up, with the latest offer of 5 trillion yen in same-day funds. It had offered a record 22 trillion on Monday, through a combination of same-day and longer tenor funds.

G7 SUPPORT

Other Group of Seven sources told Reuters that G7 finance officials would discuss what to do to calm global financial markets.

However, there is not that much that finance chiefs can do given that the market rout is largely driven by uncertainty over how the crisis at Japan's quake-crippled nuclear power plant will play out.

Operators of the Fukushima plant 240 km north of Tokyo again deployed military helicopters on Thursday in a bid to douse overheating reactors, amid growing fears that the crisis could spin out of control.

The yen had risen 4 percent against the dollar to 76.25 yen on trading platform EBS, breaching a previous record high of 79.75 set on April 19, 1995. It later bounced back to trade around 79.60 to the dollar in choppy trade.

"It's mayhem out there," said one trader at an Australian bank in Sydney. "The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in."

Some currency strategists said the fact that the yen spiked in late New York trade suggested that Japanese officials were right and the surge was driven by speculation rather than significant fund flows.

"Given that time zone in which the yen's rise took place, it would be speculators that bought the yen this morning, and not much-talked repatriation by Japanese insurers," said Koji Fukaya, chief strategist at Credit Suisse.

SPENDING TO EXCEED THAT AFTER KOBE

Seeking to put speculation of fund repatriation to rest, economy minister Yosano told reporters the amount of quake-related claims that Japanese insurers faced was less than 500 billion yen ($6 billion) and they had ample funds for payouts at home.

The disaster struck just as Japan's economy was picking up after shrinking in the last quarter of 2010, and could plunge it back into recession. The yen's surge is likely to put further pressure on the country's exporters, many of which have had to shut plants in the northeast due to a lack of power or quake damage.

Economists estimate the total cost of disaster relief and reconstruction could reach as much as 16 trillion yen ($200 billion), nearly 4 percent of gross domestic product.

Yosano told Reuters the spending on quake relief would exceed the 3.3 trillion yen Japan spent in 1995 after the Kobe earthquake. But the overall damage to the economy would not be big, he said.

Some warn that the world's-third largest economy could slip back into recession even if it should experience a growth spurt later in the year thanks to massive amounts spent on rebuilding of buildings, factories and infrastructure.

Japan's Nikkei fell more than 3 percent in early trade, with big exporters such as tech company Kyocera and car maker Honda Motor taking the most points off the index. The market later recovered some ground as the yen pulled back.

Benchmark 10-year Japanese government bond futures jumped 0.51 point to 140.23, but dropped later alongside the yen's retreat.

(Writing by Tomasz Janowski and Vidya Ranganathan; Editing by Kim Coghill)

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