Dollar Rebounds Amid Group of 7’s Pledge to Limit Yen’s Strength

A pledge by the world’s seven richest nations to resist any further rise in the yen had an immediate effect on financial markets Monday, with the dollar rebounding against the Japanese currency, although traders remained skeptical that a new trend could endure unless Japan adopts major policy changes.

The promise of coordinated action against the yen, announced late Saturday, took traders by surprise. Many had expected that the international financial leaders would not agree to act collectively, a development that could have sent the yen rocketing upward this week.

The dollar traded at 106.00 yen late Monday, a gain of nearly 2 yen from Friday. In their statement over the weekend, financial ministers of the leading industrial democracies pledged to “cooperate as appropriate” to restrain Japan’s soaring currency.

In recent months, the yen has taken on importance not only for the long-suffering Japanese but also the nation’s neighbors, whose economies have started to recover, and even for the United States and much of the rest of the world.

A strong yen could endanger Japan’s hopes for a return to prosperity by making its exports less competitive. That in turn could interfere with upturns in the rest of Asia. And it could also unleash pressures for higher interest rates in the United States if investors’ concern about the dollar’s relative weakness increases.

“If Japan, which has been growing for a half a year now, were to start shrinking again, it would have very negative effects for recovery in Asia . . . [and] potentially for U.S. growth and the stock market,” said Adam S. Posen, a senior fellow at the Institute for International Economics in Washington.

The yen has gained about 15% in value against the dollar since July, as perceptions have spread that Japan’s economy is starting to expand and investors look on Japan’s financial markets with renewed enthusiasm. The issue of the yen’s value, and its effect on the global economy, has been a hot topic in Washington, where annual meetings of the World Bank and the International Monetary Fund are taking place this week.

But experts cautioned Monday that although financial leaders of the world’s richest nations have signaled their support for a weaker yen, there is no guarantee that they can achieve that goal. Critically important, they said, is Japan’s willingness to cooperate by expanding its money supply. Even governments cannot successfully oppose the will of the global currency marketplace, which shuffles an estimated $2 trillion a day.

“If central banks challenge the currency markets, they will fail,” declared Catherine Mann, also a scholar at the Institute for International Economics. “Central banks have billions of dollars, and global financial markets have trillions of dollars.”

Bank of Japan Gov. Masaru Hayami said Monday that the institution is prepared to be flexible in responding to economic developments, apparently signaling that the central bank is willing to go further in expanding the supply of yen to stimulate the economy. The message was a key reason that investors looked at the yen in a new light Monday.

But analysts cautioned against reading too much into the vague statement, just as it is possible to expect too much from the Group of 7 largest industrial nations, which would face formidable barriers to mounting an effective, long-term campaign against market forces.

Japan’s central bank has begun to vigilantly guard its independence from political pressures. The signal of flexibility could also be interpreted as a bid to quiet critics rather than embrace fundamental policy change.

Some argue that with short-term interest rates of virtually zero and tentative signs of economic growth, Japan has no compelling reason to expand its money supply. Others, including U.S. officials, believe that with a strengthening yen and deflation in the economy, such stimulus is called for.