Members of the Group of Seven (G7) nations may be considering a joint market intervention to prevent a further surge in the yen as the Japanese currency’s sharp rise threatens the world’s second biggest economy and other Asian economies.

The yen, which is trading at around Y93 against the greenback, lurched higher today, despite the afternoon warning statement from the G7 and direct comments by the Japanese Finance Minister that currency traders said amounted to “the clearest possible” signs the Japanese Government was poised to intervene in the markets.

Analysts interpreted a rare currency volatility warning by the G7 as a sign that Japan and others may step in to foreign exchange markets and artificially force down the Japanese currency if the yen breaches the Y90 level against the US dollar.

Japanese government sources told The Times that if it intervenes to fight the prevailing market tide and weaken the yen, it “may do so with the support of other G7 nations”.

In its relentless surge higher, the yen has smashed through levels previously thought to offer more resistance. Some analysts believe that its rally may continue to Y79 – a level that would be devastating to the earnings of companies such as Toyota, Canon and Sony.

An intervention drive by the Japanese authorities could prove hugely costly: the Government would be forced to sell the yen heavily in favour of dollars and would be doing so against the powerful tide of yen-buying triggered by the global unwinding of the carry trade - the investment practice where the Japanese currency was borrowed on a large scale to finance investments around the world.

Although the Bank of Japan has remained tight-lipped on the question of currency intervention, Shoichi Nakagawa, Japan's Finance Minister, said today that he saw "excessive volatility" in the yen's exchange rate and that he was he “watching with great interest.”

This was the kind of language used by the Japanese Government during its most recent – and spectacular – bout of intervention in early 2004 where it amassed tens of billions of dollars in its effort to weaken the yen and make the country’s exports more attractive.

“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,” said the G7 statement, adding that all members “shared interest in a strong and stable international financial system” and would “co-operate as appropriate.”

Currency traders at Royal Bank of Scotland in Tokyo said that verbal intervention was no substitute for the real thing, and that Japan and the other G7 nations needed to move before any traders would believe they were serious.

Analysts at Société Générale gave warning that even if joint G7 intervention were carried out, the effects would not be long term until the yen carry trade had unwound and the pressures it is creating are relieved. “No matter what authorities do, the yen's longer-term strength will likely remain for the time being,” said SG’s chief of foreign exchange.

In what one Macquarie economist described as “slow torture” for Japan’s big exporters, the yen worked its way towards a 13-year high against the US currency, and hit an all-time high against the Australian dollar. It is trading at a six-year high against the euro, and analysts at Nomura predict further rises in the course of the next few hours as London trading begins

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