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G7 communique seen forestalling yen surge

TOKYO: The Group of Seven nations' weekend statement that they share Japan's concerns about a strong yen broke no new ground, but at least for the near term it is probably enough to keep the yen from surging, analysts say. "For the time being the dollar will be supported against the yen, but over the longer term I see the yen strengthening again," said Mitsumaru Kumagai, senior market analyst for the Industrial Bank of Japan.

"Going into the G7 meeting there had been growing scepticism about whether the G7 would say in its communique that it shared Japan's concerns about yen strength, so the dollar may be boosted initially as players buy back dollars they had sold," Kumagai said.

The yen rose to two-week highs near 104.50 to the dollar on Friday, one day before finance ministers and central bankers of the Group of Seven industrialised nations met in Tokyo.

Despite the communique, however, the dollar was likely to have a hard time rising above 106 to 107 yen, dealers said.

Japanese exporters are expected to start selling dollars for hedging purposes around 106 yen, and foreign operators' appetite for yen, whetted by optimism about Japan's economic outlook, is likely to remain strong, they said.

"Overseas investors are likely to remain active buyers of Japanese stocks," said Daisaku Ueno, senior economist for Nomura Research Institute Ltd.

The communique's statement that Japan will set policies "appropriately" indicates that fiscal and monetary policy will remain accommodative, Ueno said.

"This suggests that Japan may have pledged more fiscal stimulus and that the Bank of Japan promised to keep its zero interest-rate policy for a while longer, which would be positive for stocks," Ueno said.

Regarding exchange rates, the G7 communique said: "We welcomed the reaffirmation by the Japanese monetary authorities of their intention to conduct policies appropriately in view of their concern, which we share, about the potential impact of yen appreciation for the Japanese economy and the world economy.

"We will continue to monitor developments in exchange markets and cooperate as appropriate," it added.

The wording differed slightly from the communique issued after the previous G7 finance ministers' meeting in September, apparently putting greater emphasis on Japan's pledge and less emphasis on the G7's concern, analysts said.

Analysts said the change was too small to be read as a sign of waning G7 support for Japan's yen concerns, but it certainly did not indicate stronger support.

"There is no indication that Japan was able to win an agreement from G7 nations for joint intervention," said Nomura Research's Ueno.

Because the communique also made no reference to the euro or to concerns about high-flying U.S. stocks, the dollar may end up reaping the most benefit, traders said.

The lack of a reference to the euro suggests the U.S. is comfortable with a strong dollar despite its rising trade deficit with Europe, they said.

In a statement released after the G7 communique, U.S. Treasury Secretary Lawrence Summers said U.S. policy in favour of a strong dollar remained unchanged.

"The United States doesn't have to worry about its trade deficit right now because its economy is strong, unemployment low, and pressure from industry groups is relatively weak as a result," said Masaharu Takenaka, a chief manager for the Bank of Tokyo-Mitsubishi.-Reuters