Overnight concerted intervention to weaken the yen has met with some initial success but there is no expectation that other G7 members will commit significant sums, let alone alter their monetary policies, in support of this effort. Effective yen suppression may require vast Japanese sales and much more aggressive monetary loosening.

As discussed in yesterday's post, the medium-term impact of the Tohoku Pacific earthquake and tsunami is to cut Japan's saving surplus and put upward pressure on real interest rates and the yen. This may be regarded as a benign process by which capital is attracted back to the country to finance the massive reconstruction effort.

A large offsetting loosening of monetary policy is required to offset this natural tendency for the yen to rise. The Bank of Japan today promised "powerful" monetary easing but its only significant announcement to date has been a modest ¥5 trillion expansion of its asset purchase programme. (Temporary liquidity injections into the banking system do not qualify as monetary loosening.) Foreign currency intervention has a similar monetary impact to securities buying so would be effective if conducted on a large enough scale.

The wisdom of such action, however, may be questioned. Facing its worst disaster since the second world war, the Japanese state is increasing its liabilities not to finance reconstruction but in order to purchase foreign government securities, principally Treasuries, thereby aiding the funding of the large US fiscal deficit. The main beneficiary of a weaker yen will be Japan's multinational export companies, which are unlikely to divert an increase in their profits to the stricken region. Higher raw material imports necessary to support rebuilding and allow a shift away from nuclear electricity generation, meanwhile, will be more expensive.