Japan's policymakers, alarmed that the yen's persistent climb could derail the nation's economic recovery, see solo market intervention as an increasingly viable option, sources familiar with the matter said. The yen scaled four-month highs against the dollar on the back of market fears of a US government debt downgrade, prompting warnings from Japanese officials and executives that an unchecked yen rise was hurting the export-reliant economy.
Finance Minister Yoshihiko Noda on Tuesday repeated his mantra about closely watching "one-sided" moves, and other ministers chimed in with warnings about the risk of the currency rising too far and too fast. "Anxiety is running high. It can happen any time," a government source with knowledge of the matter said, on the possibility of solo intervention.
Another source confirmed this view, saying that authorities were prepared to act when the timing is right. Both spoke on condition of anonymity due to the sensitivity of the matter. Whether Tokyo will indeed step in - and if so, when - will depend much on the pace of yen rises and whether the moves are accompanied by sharp falls in stock prices, officials say.
On Monday, the head of Keidanren, Japan's biggest business lobby, called for joint Group of Seven intervention to stem the yen's gains as it heads back towards the record high of 76.25 hit days after the March 11 earthquake. Markets are virtually ruling out a repeat of the co-ordinated intervention that the G7 carried out in the quake's aftermath, but investors are gearing up for a possible solo Tokyo act, primed by official warnings.
"Movements have been one-sided due to external factors, but I'll closely watch market moves," Noda told a news conference. The dollar fell below 78 yen in the morning after US President Barack Obama warned of dire economic consequences if a deadlock in talks on raising the debt ceiling were to lead to a default on bond obligations. It briefly bounced, but gave up all of its gains later in the day.
"Japanese authorities could intervene solo if the dollar accelerates its fall and heads toward the all-time low hit against the yen in March," said Satoru Ogasawara, economist at Credit Suisse. Growing market worries about the possibility of a US debt default, coupled with Europe's debt problems, have been fuelling the yen's gains as investors seek the relative safety of Japan's currency.
That clouds the outlook for Japan's economy, which is just emerging from the post-disaster slump and is relying on its exports to re-ignite growth. But with the currency mainly driven by overseas developments beyond Japan's control, some market players are sceptical whether Tokyo would risk acting alone, especially given uncertainty about the outcome of US debt talks ahead of an August 2 deadline.
Some policymakers share such concerns, but others say the prominence of external factors in the yen's rise is no excuse to hold off on intervention, and worry that Japan's economy is still too weak to withstand the pain from yen gains. The yen's climb also puts pressure on the central bank to ease monetary policy further in the hope of pushing down bond yields and reining in the currency. BoJ Governor Masaaki Shirakawa warned on Monday that the yen's strength could hurt Japan's economic outlook and that the central bank would consider what it could do to support the economy in the short term.
Central bank officials say that a yen spike combined with tumbling share prices would be the most likely trigger for further easing. If the finance ministry decides to intervene, the BoJ may come under pressure to ease policy to amplify the effect.