Japanese efforts to stem sharp increases in the yen could face increasing opposition from other major economies, making it even more difficult for premier Shinzo Abe's administration to reflate the world's third largest economy out of stagnation. Senior government officials, including the country's top spokesman, have escalated warnings to speculators against pushing up the yen too much, stressing their readiness to take "appropriate action" in the market against what they see as one-sided moves.
But the jawboning has failed to stop market participants from testing policymakers' resolve with many betting Tokyo will not intervene unless the dollar falls below 105 yen or even 100 yen. Finance Minister Taro Aso issued a fresh warning on Friday, saying that rapid currency moves were undesirable and that authorities will take steps as needed.
The dollar hit a fresh 17-month low of 107.67 yen on Thursday on market expectations the US Federal Reserve will exercise caution in proceeding with its interest rate hike cycle. But a Group of 20 agreement in Shanghai in February warning countries to refrain from competitive devaluation has also emboldened yen bulls.
"The G20 meeting in February touched on competitive currency devaluation, which makes it difficult for Japan to intervene. Japan is also hosting the Group of Seven this year, which makes it difficult for Japan to move," said Kentaro Arita, senior economist at Mizuho Research Institute. Japanese financial bureaucrats dismiss such a view, pointing to other parts of the G20 communique that reserve Tokyo's right to intervene if the yen rises too sharply, namely a part that warns against "excessive volatility".
Still, former top Japanese currency diplomats with experience in currency policy negotiations with G7 economies say policymakers' hands are tied as it would be extremely difficult for Tokyo to convince other nations of the need to intervene. Japan is also unlikely to get the informal consent from its G7 peers needed to intervene without giving the impression it was engaging in "beggar-thy-neighbor" policy, said Naoyuki Shinohara, a former top Japanese currency diplomat.
"I don't think solo (yen-selling) intervention by Japanese authorities will be effective ... I would be very surprised if they act," said Shinohara, who also served as the International Monetary Fund's deputy head. Eisuke Sakakibara, another former top Japanese currency diplomat known as "Mr Yen" for his foray into currency markets, also said he did not see current yen levels as alarmingly high.
"I don't know why finance ministry officials are conducting verbal intervention now," Sakakibara said. "If I were in their shoes, I won't try to talk down the yen at least until the dollar falls below 100 yen." The yen has gained more than 10 pct against dollar so far this year, topping the euro's 5 percent rise and the 4 percent increase in the Australian dollar, as investors sought the currency as a safe haven against risks.
Japanese authorities have stayed away from the markets since they last intervened in 2011. At the time, Tokyo got G7 consent to intervene to stem a yen spike driven by speculation the devastating March earthquake would force Japanese insurers to repatriate overseas funds to pay for damages claims.
Back then, G7 economies were in much better shape and had room to allow Japan to weaken its currency to help exports. Now, patience for Japanese intervention has waned with US and European economies struggling with headwinds from sluggish emerging market demand. There is also little tolerance among G20 nations against solo Japanese currency action. The BOJ's decision in January to adopt negative interest rates drew criticism from some countries as a direct attempt to weaken the yen, officials with knowledge of currency negotiations say. Japanese nominal interest rates fell sharply as the BOJ's negative rate policy pushed yields deeper into negative territory, widening the gap between US nominal rates.
However, the gap between Japanese and US real interest rates - which takes the impact of inflation into account - narrowed, making the yen relatively attractive against the dollar and helping push up the Japanese currency, analysts say. Japanese policymakers, including BOJ Governor Haruhiko Kuroda, have kept to their view that the economy is recovering moderately despite growing signs it is skirting recession.
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