Currency Intervention: Japan And The G-7 Aims To Boost Stock Markets

Japan’s fundamental problem today is the risk of nuclear contamination and disaster recovery reconstruction. In dealing with latter, since Japan is a nation largely without resources, it will have to import them. In other words, her economic pattern will likely shift from export oriented to import dependent reconstruction.

So how do Japan and the G-7 address this predicament? Inflate the system!

This from Bloomberg, (bold highlights mine)

The Group of Seven will jointly intervene in the foreign exchange market for the first time in more than a decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake.

Japan began the effort, sending the currency down 3.1 percent against the dollar at 9:34 a.m. in Tokyo. Each of the G-7 members will sell yen as their markets open, Japan’s Finance Minister Yoshihiko Noda told reporters in Tokyo today. The G-7 said in a joint statement after a conference call of its finance ministers and central bank chiefs that it will “provide any needed cooperation” with Japan.

Japan’s central bank also said in a statement that it will pursue “powerful monetary easing” as policy makers sought to reduce the threat the world’s third-largest economy sinks into a recession. The Nikkei 225 Stock Average gained after the announcements, paring losses to 12 percent since the quake and ensuing tsunami killed thousands and led to rolling blackouts and radiation leaks at a nuclear plant.

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The Bank of Japan has been pouring cash into the financial system to stabilize money markets and on March 14 doubled an asset-purchase fund to 10 trillion yen, pledging to step up purchases of securities including government debt, exchange-traded funds and real-estate investment trusts.

Noda and Economic and Fiscal Policy Minister Kaoru Yosano sought to quell speculation driving the yen higher yesterday. Noda said markets were nervous and Yosano said there was no basis for an argument that the nation’s insurance companies were repatriating foreign assets to pay for earthquake damage.

“The speculation was that Japanese life and casualty insurers will repatriate dollar-denominated assets to secure funds in the wake of the earthquake,” Yosano told reporters in Tokyo yesterday. “But they have ample cash, deposits and other liquid assets,” he said, adding that the Financial Services Agency and Bank of Japan have confirmed insurers aren’t selling their dollar assets.

Weakening the Yen would make imports more expensive at the time when the Japanese would need alot of resources.

Moreover a weak yen hardly deals with the risk of nuclear contamination.

So you see, Japan isn’t trying to deal with her fundamental problems. Instead Japan and the G-7 is trying to goose up the stock markets and other financial markets in order to save the banking elite. As well as, approach the economic recovery angle from the wealth effect-aggregate spending point of view.

See how predictable they are!

A Wall Street axiom says, “Don’t fight the Fed”. I’d paraphrase this and say ‘don’t fight central banks and governments determined to destroy the purchasing power of your money, be it the US dollar or the Yen or the Peso’.

And this is why increasing cash balances represents fighting the major trend.