In its state budget for the next fiscal year beginning in April 2011, the government will raise the borrowing limit for currency intervention for the foreign exchange special account by 5 trillion yen ($60 billion) to 150 trillion yen.

Prior to the budget announcement, sources familiar with the situation told Reuters that Tokyo would raise the ceiling by that amount in response to an increase in its debt issued to finance currency intervention.

Japan spent more than 2 trillion yen in September in its first currency intervention in more than six years, to stem a rise in the yen that has hobbled the crucial export sector and threatened to derail the country's economic recovery.

The intervention took some of the steam out of the yen's surge, and while the Japanese currency later strengthened again to 15-year highs against the dollar in November, it has since retreated.

The government's foray into the currency market led to an increase in the amount of financing bills (FBs) issued to finance currency intervention to 112 trillion yen as of end-September, up 7 trillion yen from March.

While that remains below the 145 trillion yen borrowing ceiling, the government likely decided to raise the cap as a precautionary measure to retain flexibility in case it needs to act in the market again.

The government had also raised the borrowing limit by 5 trillion yen for the current fiscal year.

"Since the government has been saying it will take decisive action if necessary to prevent the yen from rising, it is increasing the ceiling in case it needs to act in the market in the future," said Ayako Sera, market strategist at Sumitomo Trust & Banking.

"Given current dollar/yen levels, market speculation about Japanese intervention has not risen. But if the yen starts to rise towards 80 to the dollar again, speculation over intervention may re-emerge."

The dollar is now hovering around 83 yen, well above a 15-year low of 80.21 yen hit in November.