Japan's government sharpened its rhetoric on foreign exchange intervention on Wednesday as a rise in the yen to a 15-year high underlined concerns that the currency's strength could threaten the economic recovery.
Investors ignored the official talk as they pushed the yen to a 15-year high of more than 83.40 per dollar as markets doubt Japan will risk going solo and have all but ruled out coordinated intervention with other Group of Seven countries.
Japanese machinery orders surged by the most in seven months in July, government data on Wednesday showed, but the report did little to ease concern that a surging yen could undermine the country's important export sector, which has been critical to fuelling the recovery from the global economic crisis.
As the yen surged, the Nikkei stock average fell more than 2 percent as investors worried about the hit to export earnings.
Japanese officials have been trying to talk down their currency, but so far their comments have had little effect as the yen is rising more due to concerns about a slowdown in the global economy and the health of the European banking system.
"Basically, it is important to closely communicate with the international community and we are currently making efforts on this," Finance Minister Yoshihiko Noda told lawmakers in parliament.
"In the end, we will take decisive measures including intervention when needed."
The remarks indicated a shift in Noda's language. He has repeatedly declined to comment on intervention when asked about it by media.
The government will make necessary preparations for intervention and intervention should be conducted in the most effective way possible, Parliamentary Secretary of Finance Hiroshi Ogushi also said.
The Bank of Japan has indicated it was willing to ease monetary policy to help the economy, but will likely bide its time until the ruling party decides who will be the country's next leader.
"They are trying to talk as much as they can, but we think actual intervention is unlikely because other G7 countries wouldn't cooperate," said Thomas Harr, head of Asian foreign exchange strategy at Standard Chartered in Singapore.
"The most likely outcome is more easing from the BOJ, which may be some measures to lower short-term interest rates."
The yen rose as high as 83.34 per dollar.
Japan has not intervened in the currency market since March 2004, the end of a 15-month period during which it spent 35 trillion yen to support an economic recovery.
The economic data showed that core private-sector machinery orders, a highly volatile series seen as a leading indicator of capital spending, rose 8.8 percent in July.
That was the biggest gain since a 15.4 percent rise in December and more than the median market forecast for a 1.8 percent increase, the figures showed.
Economists say the strong gains in corporate spending are unlikely to last because of the damaging impact a rising yen can have on corporate sentiment.
"Given the yen's rise and a slowdown in overseas economies, corporate investment will likely remain sluggish even if it picks up from low levels," said Junko Nishioka, chief economist for Japan at RBS Securities in Tokyo.
"As markets focus on the yen's strength, the government should take steps to help financing of small firms. The BOJ, meanwhile, should strengthen its monetary easing stance even if it risks being criticized for bowing to government pressure."
The BOJ stood pat on monetary policy on Tuesday but vowed timely action when needed, setting the stage for possible easing next month.
By then, the leadership of the ruling Democratic Party will be known and the central bank will have a clearer idea about what damage the yen is doing to Japan's exports.
BOJ Governor Masaaki Shirakawa reiterated on Wednesday his reluctance to return to quantitative easing to support the flagging recovery but indicated he was weighing its options.
Japanese Prime Minister Naoto Kan is fighting to retain his post in a leadership vote next week in the Democratic Party that pits him against party powerbroker Ichiro Ozawa.
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