LONDON, Sept 22 - The yen staged a meteoric rally to near three-year highs against the dollar on Monday on speculation Japan would become less aggressive in yen-selling intervention after the weekend Group of Seven meeting. The G7 called for more exchange rate flexibility to help iron out global economic imbalances and markets interpreted its statement as criticism of persistent intervention by Asian countries to weaken their currencies and boost domestic exports. However, Japan quickly tried to stop the damage, with top financial diplomat Zembei Mizoguchi saying on Monday the country's stance of acting in the foreign exchange market as needed had not changed after the G7 meeting.
The yen, which gained more than two percent to hit 111.41 per dollar , eased somewhat as Japan's newly-appointed finance minister Sadakazu Tanigaki also affirmed the view. "This was a very important G7 meeting. Japan is recovering, the U.S. is having a jobless recovery and euroland's recovery is not impressive at all. In this context, the G7, which previously had never agreed on anything, now agreed on (a flexible exchange regime)," said Stephen Jen, chief currency economist at Morgan Stanley in London. "The strong dollar policy is now officially declared dead and the dollar index will correct lower. But I don't think Japan will stop intervening -- especially because if all of Asia cease to intervene, it will certainly lead to the collapse of the dollar." By 0945 GMT the yen was up 1.6 percent on the day versus the dollar at 112.31 yen and trading at 128.68 per euro , up three quarters of a percent. General dollar weakness helped the euro to set an eight-week high near $1.1495 .
FUTURE OF YEN POLICY
The G7 reaffirmed that exchange rates should reflect economic fundamentals, rather than issuing its usual promise to "monitor exchange markets closely and co-operate as appropriate". "In this context, we emphasise that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms," it said. The G7 did not mention specific currencies in its statement, but analysts interpreted it as direct criticism of China and Japan, prompting speculation Japan will find it difficult to conduct aggressive currency intervention in the future. "The wording of the communique seems stronger language than we anticipated. It could be viewed as a victory for the U.S. side of the argument and for (U.S. Treasury Secretary) John Snow," National Australia Bank strategist Greg McKenna said. Throughout this year Japan has been intervening to stop the yen from strengthening to support its export-driven recovery. Few people believe however that Japan could afford to stop intervening altogether. "Japan's economy has only just come off the respirator and the country won't want the yen to strengthen too much, no matter what the Americans say. It would be too great a risk for exporters and the Nikkei," said Neal Kimberley, senior foreign exchange manager at Bank of Tokyo-Mitsubishi.
Tokyo stocks suffered their biggest percentage loss since the September 11 attacks two years ago, falling four percent <.N225> as a surging yen hit exporter shares. Monday's reshuffle in Japan's government was also seen as keeping the fire going underneath the yen after Prime Minister Junichiro Koizumi reappointed the reformist Heizo Takenaka as economics and financial services minister. "The Tanigaki-Takenaka appointments suggest Koizumi is showing determination about structural reform and overseas investors are likely to welcome the reshuffle," said Junya Tanase, forex strategist at JP Morgan Chase in Tokyo.//