A coordinated move by central banks of rich nations to stabilize the yen's value appeared to be having a decisive effect on Friday, after a sharp rise in the yen after Japan's devastating earthquake and nuclear crisis raised fears about the global economy.
The action by the Group of Seven, in which they poured billions of dollars into markets, was the first joint intervention in currency markets since the G7 came to the aid of the newly launched euro in 2000.
The U.S. dollar surged two full yen to as much as 81.98 yen in response, up from a record low of 76.25 hit on Thursday. Traders estimated the Bank of Japan alone bought more than $25 billion, paying with yen to effectively weaken the currency's value by boosting the supply.
The decision to synchronize an intervention was made during a telephone conference call that took place on Thursday night, North American time, and by Friday morning all the G7 nations had entered the markets in a massive show of unity.
The U.S. Federal Reserve, Bank of England, Bank of Canada and European Central Bank, which represents all 17 countries that use the euro, each separately confirmed they were intervening to keep the yen's value from climbing.
The action helped settle equity markets, which had seen heavy selling in volatile trade since the earthquake and tsunami struck Japan, the world's No. 3 economy, last Friday and triggered a crisis at nuclear power plants. Investors have struggled to get a handle on the economic fallout.
The impact on the Japanese economy in isolation is likely to be contained, but the ripple effects could be substantial, and perhaps long-lasting, the Institute of International Finance, which represents global banks, said in a statement.
Japan's deputy finance minister, Fumihiko Igarashi, warned that currency traders shouldn't consider the intervention a one-time-only move, pledging that the G7 would act decisively again if speculators tried to push the yen higher.
G7 countries agreed that if we caved in to such speculators that took advantage of people's misfortunes, the Japanese economy would be ruined and the whole world economy would be harmed, Igarashi told Reuters in an interview.
Our stance remains unchanged that we will take decisive steps against speculators who act like sneaky thieves at a scene of a fire.
The G7, in its statement Thursday night announcing the decision to intervene, said that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.
DISPELLING THE GLOOM
No figures were available for how much the G7 -- Canada, France, Germany, Italy, the United Kingdom, the United States and Japan -- may have spent in total buying dollars, euros and pounds. But analysts said the show of unity was the point.
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.
Japan's Nikkei share index climbed close to 3 percent, recouping some of the week's stinging losses after the earthquake, tsunami and nuclear power plant crisis. In early afternoon, the Dow Jones industrial average was ahead more than 100 points and world stocks as measured by the MSCI index were up 0.8 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.
The yen's rise in the wake of the devastating earthquake and tsunami a week ago seems counter-intuitive at first glance. But it reflects, in part, market speculation that Japanese firms and Tokyo will repatriate money for purposes including paying insurance claims and rebuilding.
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.
Analysts were watching warily to see whether the impact of intervention will be lasting, cautioning that the maximum benefit from it likely would occur on Friday. U.S. officials were maintaining a stoic silence about any further actions.
Usually with each intervention, you end up seeing a diminishing marginal return. So the first-time round usually has the biggest impact, said David Morgan, head of research for the Americas at Standard Chartered in New York.
It'll become increasingly difficult for intervention to be successful, he added.
U.S. Treasury Secretary Timothy Geithner, who heads for Brazil on Friday night with President Barack Obama, spoke with French Finance Minister Christine Lagarde, whose government currently chairs the G7, and Japanese Finance Minister Yoshihiko Noda ahead of Thursday night's intervention call.
Geithner let Obama know ahead that the G7 was embarking on a coordinated intervention.
The United States has been at pains to stress its willingness to help stricken Japan overcome the triple disaster of the earthquake, tsunami and nuclear crisis.
In a measure of the severity of the situation Tokyo now faces, Japanese engineers conceded on Friday that burying a crippled nuclear plant in sand and concrete may be a last resort to prevent a catastrophic radiation release.
That was the method used to seal huge leakages from Chernobyl in 1986 and was taken as a sign that Japan's piecemeal actions, such as dumping water from military helicopters or scrambling to restart cooling pumps, may not work.
(Additional reporting by Wayne Cole, Wanfeng Zhou, and Daniel Flynn; writing by Glenn Somerville; Editing by Leslie Adler)