Japan's finance minister further sharpened his rhetoric on the yen's steep gains after the Nikkei newspaper reported Japan may consider selling the yen in unilateral intervention if speculators drive up the currency.
Finance Minister Yoshihiko Noda told reporters he would respond appropriately as needed, an expression he hasn’t used so far in his campaign to talk the currency down.
The yen rose to a 15-year high against the dollar and a nine-year peak against the euro on Tuesday amid fears the global economy is slowing, testing Japanese authorities' resolve to stem the currency's climb.
The sharp yen rise and declines in the Nikkei stock average have increased the likelihood that the Bank of Japan will further ease its monetary policy before its scheduled rate review next month, sources told Reuters.
"The dollar went to 83 yen, so the chance of intervention has increased, but it would take more than intervention," said Kiichi Murashima, economist at Citigroup Global Markets in Tokyo.
"It has to be coupled with easing by the BOJ to have any impact."
The finance ministry will consider intervening unilaterally if the Japanese currency rises at a pace of several yen against the dollar in a single day, the Nikkei reported in its Wednesday morning edition.
The dollar sank as deep as 83.60 yen at one point, before crawling back to 84.25 on the Nikkei report. The euro fell as much as 2.2 percent to 105.44 yen, before steadying at 106.43.
Japanese policymakers have tried to stem the yen's gains with verbal intervention and Noda expressed Tokyo's increased irritation with the currency's climb on Tuesday.
But that was not enough to stop traders from pushing the yen to new highs as markets took his refusal to comment on the chance for intervention as a sign the authorities were not ready yet to back up words with action.
On Wednesday Noda further toughened his rhetoric.
"When necessary we must respond appropriately," he told reporters when asked about yen moves.
Japan has not acted in the currency market after ending in 2004 a massive yen-selling intervention aimed at preventing a rapid yen rise from aggravating deflation and derailing a fragile economy.
Annual growth in Japan's exports slowed less than expected in July, finance ministry data showed on Wednesday, due to a rise in shipments to the United States in Europe.
Yet economists still expect export growth to slow in coming months due to signs the global economic recovery is faltering, and a rising yen only adds to worry as it makes Japan's products more expensive overseas.
Tokyo will probably have difficulty convincing its U.S. and European counterparts to jointly step into the markets, given that they see little need to reverse the weakening of their currencies that benefit exports.
But solo intervention by Japan is unlikely to have much effect in curbing yen gains, traders say, and for weeks markets have speculated that the authorities would rather cooling off the yen's rally with some form of monetary
The central bank is lining up its options, although officials are divided on whether to do so before its Sept. 6-7 rate review at an emergency meeting.
The most likely scenario is for the BOJ to increase the size or extend the duration of a short-term fund supply scheme put in place in December, sources familiar with the matter say.
The Nikkei also said the BOJ is considering taking additional monetary easing steps and may do so at an emergency meeting.
"With U.S. yields where they are, all simple intervention will do is give speculators better levels at which to buy yen," said Brian Dolan, chief strategist at Forex.com in Bedminster, N.J.
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