Yen at 13 year high, Nikkei at 26 year low, Japan headed for recession

The global credit crunch and market rout are clearly scaring Japanese officials. On Oct. 27, Tokyo took the unusual step of rallying the world's richest nations to warn investors that the Japanese currency's rise to its highest level in years poses a threat to the global economy. In a statement, the Group of Seven specifically singled out the yen's "recent volatility" as a possible factor in undermining "economic and financial stability."

The G-7's show of solidarity came hours after Japan's Finance Minister, Shoichi Nakagawa, used strong language condemning the yen's sharp rise last week to a 13-year high against the dollar and six-year high against the euro. Traders viewed the remarks as a signal that Japanese financial authorities stood ready to intervene for the first time since early 2004.

Action can't come soon enough in the view of many market watchers. "This massive strengthening in the value of the Japanese yen," Standard Chartered Bank (STAN.L) currency analysts wrote in an Oct. 24 report, "is coming at exactly the wrong time." They predicted "it may not be long before we see the Japanese authorities intervene to limit the slide."

Nikkei Index Falls 6.4%

Help may be on the way, but it didn't arrive today. With critics complaining that the comments from Nakagawa and the G-7 had little impact, the yen kept on gaining strength against the dollar, trading at around 93 yen and the euro at 116 yen. The rising yen, combined with concern that plans by Japanese banks to raise capital may dilute shareholdings, knocked Japan's benchmark Nikkei 225 stock index to its lowest level in 26 years. The index finished 6.4% lower, at 7,162.90, a level not seen since October 1982. This month alone, the Nikkei has given up 36%; since January, it has fallen 53%.

The world's leading industrial countries are worried about the recent sharp rise in the value of the Japanese currency.

The financial ministers and central bank presidents of the Group of Seven major industrial countries issued a joint statement late Sunday in which they expressed their concern about the recent volatility of the yen.

The yen rose to a 13-year high against the dollar in trading Friday, raising concerns in Japan that it could harm its exports of cars and other products because they will now cost more in U.S. markets.

The statement by the G-7 finance officials was released in Washington, Tokyo and other G-7 capitals.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 finance officials said.

The group reaffirmed its shared interest in a "strong and stable financial system" and pledged to continue to monitor markets and "cooperate as appropriate."

Such a pledge could indicate the possibility of joint intervention in currency markets where governments would sell and buy currencies in an effort to influence their values.