A coordinated move by central banks of rich nations to stabilize the yen appeared to be working on Friday, tamping its value down after Japan's devastating earthquake and nuclear crisis triggered a yen surge and 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. It dropped back to under 81 yen in early afternoon trade but remained above what some analysts suggested was a psychologically important level of 80 that could heighten chances of more intervention.
The G7 move reflected concern that a soaring yen could curb Japan's exports and throw the world's third largest economy back into recession, slowing global growth and sapping market confidence.
The yen's surge in the wake of the earthquake and tsunami may have seemed counter-intuitive at first glance, but it reflected, in part, market speculation that Japanese firms and the Japanese government will repatriate money now invested overseas in order to pay insurance claims and the cost of rebuilding.
Traders on Friday 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.
Every member of the G7 was involved in Friday's market intervention, a massive show of unity designed to brush back speculators who might have been more willing to question the resolve of Japan if it had attempted the effort alone.
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 last Friday and triggered a crisis at nuclear power plants. Investors have struggled to get a handle on the economic fallout.
Tokyo Electric Power Co on Friday afternoon North American time said it had connected an external power cable to the stricken Fukushima Daiichi nuclear plant, a first step toward restarting the plant's cooling pumps as it races to prevent a catastrophic radiation leak.
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.
SHOW OF SOLIDARITY
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 New York, the Dow Jones industrial average finished up 0.7 percent, closing out a volatile week that saw a total loss of 1.5 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.
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)