The yen closed in on a multiyear peak versus the dollar on Monday following a newspaper report that Japan had ended its campaign to weaken its currency because the economy no longer needed propping up.
Officials at both the Finance Ministry and the Bank of Japan (BoJ) said that Japan's currency policy had not changed, playing down the report and beating back the yen from the day's highs.
Still, the story on the Web site of the Times of London made dollar bulls nervous, hammering home the idea that Japan cannot rely on massive forex intervention forever and needed an exit strategy.
"I was sceptical about the article at first," said Satoshi Tokuda, forex manager at Sumitomo Corp "but then I started to think it might be true. They might not stop intervention suddenly, but they may scale it back gradually.
The report, which quoted BoJ officials but not the Finance Ministry which directs intervention, said that Japanese officials think that intervention is no longer necessary because the country's economic recovery is gaining strength.
But Finance Ministry officials reiterated on Monday that Tokyo would continue to intervene if needed.
"It is a speculative article. There is no change in our policy," said Finance Minister Sadakazu Tanigaki.
A BoJ spokesman also said it could not confirm the Times report, saying the central bank was not in a position to comment on currency policy.
Japan has sold more than 30 trillion yen ($285 billion) in currency intervention since early 2003 to curb the yen's strength, which could harm Japanese exporters.
The dollar was around 105.60 yen, still down about 0.4 percent from around 106 yen in late New York on Friday.
The dollar dropped below 105.30 yen in early Tokyo trade, its lowest level since mid-February when it fell to a three-year low of 105.16 yen before rebounding on intervention. The Japanese currency also surged against the euro to a 4-1/2 month high of around 127.40 yen.
While many dealers assume that Japan will not suddenly quit its yen-selling campaign, they were also pondering how far Japan would tolerate the yen edging up as the nation's economic recovery continues.
For now, the focus is on the key 105-yen area, seen as a major defence line for the Japanese government and the rate forecasted by many of Japan's major exporters such as auto firms for the second half of the current business year.
Some analysts think the US currency will break through 105 yen soon.
"I think the dollar will eventually fall below 105 yen. It's a matter of time," said Junya Tanase, strategist at J.P. Morgan Chase.
The euro eased about 0.3 percent versus the dollar to $1.2085 near a three-week low of $1.2070 hit on Friday, hurt by speculation that the European Central Bank may cut rates soon,
Last week the head of Germany's influential Ifo economic research institute urged a ECB rate cut to help support the euro zone's fragile recovery.
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