In a rare concerted move, the central banks of major economies intervened in the foreign exchange markets on Friday to keep the value of the Japanese yen from appreciating. The currency had been appreciating since last week’s devastating earthquake and tsunami, and the currency broke through to record highs in late-day trading on Wednesday. Trading in the yen had become chaotic earlier in the week, with the yen surging 4.6% within minutes, similar to the “flash crash” of stocks last May. Part of the challenge is that there are too many buyers trying to buy yen from too few sellers. Both companies and individual investors seem to be trying to buy up yen. The coordinated effort by the Bank of Japan, the European Central Bank, the Federal Reserve and monetary authorities in Canada and the United Kingdom pushed the Japanese currency down more than 3% against the U.S. dollar, though there are concerns about the sustainability of the effects.

QUESTIONS FOR DISCUSSION:

1. Central bank interventions often have proved futile in sustaining a currency’s value over the long-run. Is this coordinated effort likely to achieve its goals?
2. How long should central banks intervene in the exchange markets or what signals would indicate it is time to let market forces once again determine the currency’s value?
3. What are the risks to the Japanese economy if yen trading continues to be unpredictable or if the currency’s appreciation continues?
4. Part of the rapid climb of the yen on Wednesday seems to have been from automatic trades that were triggered when the yen hit certain levels. Given that automatic orders and trades orchestrated by supercomputers seem to dominate the financial markets, how can a company best protect against unpredictable and perhaps illogical fluctuations in exchange rates?

SOURCE: Lauricella, T., & Scott, A. (2011, March 19). G7 moves in sync to steady yen. Wall Street Journal, p. B1. (Retrievable online at: http://online.wsj.com/article/SB10001424052748703512404576208283482303132.html)

RELATED ARTICLE: Lauricella, T., & Martin, K. (2011, March 18). Behind yen’s record surge. Wall Street Journal, p. C1. (Retrievable online at: http://online.wsj.com/article/SB10001424052748704261504576205564007066134.html)

Related video clip available at: http://www.youtube.com/watch?v=zIhk2YrpTP8

Kotecha Says G-7’s Yen Action Draws `Line in the Sand’

Related video clip available at: http://www.youtube.com/watch?v=TCr6-AkjE58

Bennenbroek Says Further G-7 Yen Intervention Possible