Japan bought billions of dollars to restrain a soaring yen on Friday, kicking off joint market intervention by the world's richest nations to calm global markets made nervous by the threat of a meltdown at a nuclear power plant near Tokyo.
After a week of panicky trading, the U.S. dollar surged two full yen to as much as 81.83 yen, leaving behind a record low of 76.25 hit on Thursday as the Bank of Japan stepped into the market.
Traders and media reports estimated it bought more than $25 billion. Now the likes of the U.S. Federal Reserve and the European Central Bank are set to join the action in the Group of Seven's first combined intervention in a decade.
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 as Japan reeled from an earthquake, tsunami and the nuclear power plant crisis. The market's losses for the week are 10 percent.
The G7 announced its intent to jointly intervene after a short teleconference early on Friday in a demonstration of solidarity with disaster-hit Japan.
The decision came as a surprise to many because Tokyo had indicated it was looking for moral support for its attempts to assuage markets rather than joint action.
The last joint intervention was a decade ago when the rich nations moved to turn a slumping euro following its 1999 launch.
Japan's Finance Minister Yoshihiko Noda said the Bank of Japan had begun to sell yen at 8 p.m. ET and other central banks from the G7 would intervene as their markets opened.
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 mop up any extra cash in the economy that results from currency intervention for fear that the additional liquidity could fuel inflation.
On Thursday, the yen had soared to a record high of 76.25 per dollar, eclipsing its historical peak of 79.75 hit in the aftermath of the Kobe earthquake.
The yen jumped amid speculation Japanese firms would repatriate some of their huge foreign assets to help meet insurance claims and pay for reconstruction.
A strong yen could make it more difficult for the heavily export-dependent Japanese economy to recover from the triple blow of last week's earthquake, tsunami and nuclear threat.
The damage toll is already estimated at up to $200 billion with Japan almost certain to slip back into recession.
G7 financial leaders may be worried that a surge in yen repatriation could unsettle global markets, creating a crisis of confidence that spreads from Asia to Europe and the United States.
As we long have stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability, the G7 said in a statement.
Investors were also keeping a wary eye on events in Libya as the United Nations voted to impose a no-fly zone over the country and use all necessary measures to protect civilians. French diplomatic sources said military action could begin within hours of the Security Council vote.
Oil prices were up about 1.2 percent at more than $116 a barrel on the decision, which was seen as risking prolonging the conflict in the North African nation.
HISTORY NOT IN G7's Favor
Still, if past is prologue, even massive official selling might not restrain the yen for long.
When Japan last intervened in September 2010, it sold a huge 2.1 trillion yen, or around $25 billion back then, but only managed to push the dollar up from 82.85 to 85.77 yen.
The shock value quickly faded and by late October the dollar was down around 80.00.
History isn't on the G7's side, said John Normand, a currency analyst at JPMorgan, noting past acts of concerted intervention only worked when backed by a tightening of monetary policy.
In this case, there is almost no chance of the Federal Reserve raising interest rates for months to come. The European Central Bank has signaled an intent to hike rates in April, but that might not help the dollar against the yen.
The G7 can be a market mover initially, but it shouldn't be a trend-changer any more than the September 2010 yen intervention was, argued Normand.
The G7 comprises Canada, France, Germany, Italy, Japan, the United Kingdom and United States.
Late Thursday, President Barack Obama said the United States will do all it can to help Japan recover while playing down fears a drifting cloud of radiation could reach the U.S. West Coast.
Rising alarm over the unfolding disaster in the world's third-largest economy has sent shudders through markets, hitting shares and commodities, as investors sought the safe haven of government debt.
Japanese engineers on Friday raced to restore a power cable at the nuclear power plant in the hope of restarting pumps needed to pour cold water on overheating fuel rods and avert a catastrophic release of radiation.
They conceded though that burying the crippled plant in sand and concrete may be the only way to prevent a catastrophic radiation leak, the method used to seal huge leakages from Chernobyl in 1986.
The G7 deal and Obama's statement suggest a heightened degree of concern among top policymakers at the threat posed by the disaster at a time when the global economy is still recovering from its worst downturn in nearly 80 years.
Europe is wrestling with a debt crisis, and the Fed is buying up domestic government debt to safeguard a stop-start economic bounce back in the United States.
I think the world economy is going to go right down, and it has happened at a time when financial markets are still fragile, said a G7 central banker who declined to be named.
Japan's triple disaster, unprecedented in a major developed economy, is already disrupting global manufacturing.
Makers of equipment for mobile telephones to car makers and chipmakers have warned of a squeeze on their businesses given Japan's crucial role in many supply chains that keep global commerce ticking over.
The technology sector felt an immediate impact after Friday's quake and tsunami since Japan makes around a fifth of the world's semiconductors.
The latest ripples in the global supply chain were felt by General Motors Co, the largest U.S. automaker, which said it would temporarily idle a pick-up truck plant in Louisiana.
Apple Inc, meanwhile, may face shortages of key parts for its newly-released iPad 2, according to a report from research firm IHS iSuppli on Thursday.
Economists fear an extended slump for the economy.
The sheer complexity of the damages makes it difficult to grasp the impact of the earthquake, says Kyohei Morita, an economist at Barclays Capital.
Indeed, an analysis of the domestic real economy alone requires an assessment not only of building damages but also lifeline disruptions, planned blackouts/voluntary energy conservation and the state of nuclear power generation.
The Nikkei newspaper on Friday reported the government was considering mandatory power usage cuts for businesses and households to avert a major blackout in greater Tokyo.
Quoting government sources, the Sankei newspaper said Japan might issue 10 trillion yen in emergency bonds to fund reconstruction, which would add to an already massive mountain of public debt.
Still, the effect on global growth may be more limited. BNP Paribas estimates the disaster will shave 3 percent from Japan's projected GDP this year. That would account for just 0.2 percent of world output.
(Additional reporting by Wanfeng Zhou, Leika Kihara, Daniel Flynn, Glenn Sommerville and Lesley Wroughton; Editing by Neil Fullick)