The Japanese yen has hit its strongest level against the US dollar since the end of World War II.
The exchange rate reached 76.25 yen to the dollar during US trading hours, though by Thursday afternoon in Asia it was back at 79.14 yen. Meanwhile, the Nikkei 225 index shed another 1.4%, on concerns about the impact of a strong yen on exporters.
G7 finance ministers are to hold a conference call to discuss how to deal with global market volatility.
The G7 is a group of the world's seven richest nations, including the US, Japan, the UK and China.
The latest market jitters come as the US expressed increasing alarm at Japan's ability to contain a possible nuclear disaster at the Fukushima Daiichi reactors, and ordered its citizens to evacuate from Tokyo.
Repatriation Continue reading the main story 
Other Japanese investors also own large holdings of foreign currency assets.
During periods of volatility - such as the 2008 financial crisis - investors responded by repatriating these assets, pushing up the yen's value, and thereby cementing its status as a haven currency.
'Nervous' markets Analysts expect the G7 ministers to give Japan the go-ahead to intervene in currency markets to stabilise the yen.
"It seems inevitable that the yen will be part of a broader discussion on stabilising global markets," said Alan Ruskin of Deutsche Bank.
"It would be nothing short of amazing if they fail to at least make some veiled threat of intervention," he added.
Japan's Finance Minister Yoshihiko Noda declined to comment on whether or not Japan would step into the market but said he would keep an eye on developments.
"I will be closely watching market moves today," he said.
However, economy minister Kaoru Yosano commented on Thursday that financial markets had not yet been destabilised enough to warrant a currency intervention by the G7 to weaken the yen.
"We would like to get psychological support from the G7," he said.
The economy minister also said the Japanese government did not yet intend to buy shares in order to stop the stock market sell-off.
The Nikkei has fallen 14% since the earthquake struck.
Cash injection In an effort to ease market concerns and provide liquidity, Japan's central bank pumped a further 6 trillion yen ($63bn; £39bn) into the banking system.
This is the fourth such injection of funds by the Bank of Japan, taking its total funds inflow to 34tn yen.
The Bank of Japan faces a policy conundrum.
With Japanese rates already at almost zero, the central bank cannot cut interest rates in order to weaken the yen against other major currencies, such as the dollar or euro where interest rates are also close to zero.
Analysts think the central bank may now go a step further and intervene directly in markets to stem the currency's rise by selling yen and buying dollars and other foreign currencies.
"Apart from intervention, there isn't much to stop this slide and the dollar doesn't look like it's coming back soon," said Brian Dolan, chief strategist at Forex.com.
http://www.bbc.co.uk/news/business-12768098
US Dollar v Japanese Yen
Last Updated at 17 Mar 2011, 09:50 GMT *Chart shows local time | $1 buys | change | % |
|---|---|---|
| 78.8650 | + +1.62 | + +2.09 |
Japan's currency has been strengthening steeply since Japan was devastated by a magnitude 9 earthquake on Friday. A rise in the yen is seen as undesirable as it undermines the competitiveness of Japanese exporters.
Analysts have been blaming the strengthening of the yen on the repatriation of assets and foreign currency by Japanese insurance firms. Other Japanese investors also own large holdings of foreign currency assets.
During periods of volatility - such as the 2008 financial crisis - investors responded by repatriating these assets, pushing up the yen's value, and thereby cementing its status as a haven currency.
'Nervous' markets Analysts expect the G7 ministers to give Japan the go-ahead to intervene in currency markets to stabilise the yen.
"It seems inevitable that the yen will be part of a broader discussion on stabilising global markets," said Alan Ruskin of Deutsche Bank.
"It would be nothing short of amazing if they fail to at least make some veiled threat of intervention," he added.
Japan's Finance Minister Yoshihiko Noda declined to comment on whether or not Japan would step into the market but said he would keep an eye on developments.
"I will be closely watching market moves today," he said.
Continue reading the main story
“Start Quote
End Quote Brian Dolan Forex.comApart from intervention, there isn't much to stop this slide and the dollar doesn't look like it's coming back soon”
The minister has blamed speculation for the yen's surge.
"Market moves have been nervous amid speculation, while trade has been thin," Mr Noda said. However, economy minister Kaoru Yosano commented on Thursday that financial markets had not yet been destabilised enough to warrant a currency intervention by the G7 to weaken the yen.
"We would like to get psychological support from the G7," he said.
The economy minister also said the Japanese government did not yet intend to buy shares in order to stop the stock market sell-off.
The Nikkei has fallen 14% since the earthquake struck.
Cash injection In an effort to ease market concerns and provide liquidity, Japan's central bank pumped a further 6 trillion yen ($63bn; £39bn) into the banking system.
This is the fourth such injection of funds by the Bank of Japan, taking its total funds inflow to 34tn yen.
The Bank of Japan faces a policy conundrum.
With Japanese rates already at almost zero, the central bank cannot cut interest rates in order to weaken the yen against other major currencies, such as the dollar or euro where interest rates are also close to zero.
Analysts think the central bank may now go a step further and intervene directly in markets to stem the currency's rise by selling yen and buying dollars and other foreign currencies.
"Apart from intervention, there isn't much to stop this slide and the dollar doesn't look like it's coming back soon," said Brian Dolan, chief strategist at Forex.com.
http://www.bbc.co.uk/news/business-12768098
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