TOKYO (Reuters) ? Japan primed markets on Tuesday for currency intervention after the yen tested record highs overnight, signaling it may try to tame the unit with a combination of yen-selling and easier central bank monetary policy.
Even as the yen climbed down from Monday's peaks, verbal intervention by Japanese officials took on a new, more direct tone, suggesting they were increasingly convinced markets needed a nudge to keep the yen at levels the economy could live with.
The yen traded as high as 76.29 per dollar on the EBS platform on Monday, close to its record high in March of 76.25. The currency backed off to around 77.40 on Tuesday.
"It's hard to comment on current exchange-rate levels. But the yen is being valued stronger than we think ... I'd like to watch currency market conditions especially carefully today," Finance Minister Yoshihiko Noda told parliament.
The yen has soared nearly 5 percent in the past month, as investors dumped the U.S. dollar in favor of other liquid assets out of fear that the world's biggest economy may lose its coveted AAA credit rating because of its huge debt.
The yen fell from Monday's highs after the House of Representatives approved a last-gasp deal to raise the U.S. borrowing limit in a crucial step toward averting a catastrophic debt default.
But Noda made plain the yen was still too high for Tokyo's taste. He said he was in discussions with the Bank of Japan and international partners about the yen's strength, which if persistent would hurt several sectors of the Japanese economy.
A government official, speaking on condition of anonymity, told reporters that Tokyo had not yet decided whether to intervene. But markets players were increasingly convinced it was a matter of when, rather than whether, Tokyo would act.
"Japan could intervene in the currency market anytime," said Masamichi Adachi, senior economist at JPMorgan Securities Japan. "The authorities are likely waiting for a good time not in terms of yen's levels but such factors as market liquidity and changes in sentiment."
"Because Finance Minister Noda is the prominent candidate for the next prime minister, he cannot afford to do nothing or request nothing of the BOJ," Adachi added.
BOJ ON STANDBY
Reinforcing a sense of urgency, the central bank was likely to ease its already ultra-loose monetary policy if the finance ministry decided to intervene and sell yen, sources familiar with the central bank's thinking told Reuters.
The idea of loosening policy would be to amplify the impact of any intervention, they said. The BOJ is due to hold a regular policy review on Thursday and Friday this week.
"If there is intervention, there is a strong chance the BOJ will ease policy," said one source, who spoke on condition of anonymity due to the sensitivity of the matter.
BOJ hopes further easing, likely a move to expand its 10 trillion-yen asset buying program by 5 trillion yen, would also help shore up business confidence threatened by the currency gains, sources said.
The current yen level is still far above the average of 82.59 that Japanese manufacturers have used to make their current earnings forecasts and Japanese exporters, including leading carmakers such as Toyota Motor have become increasingly vocal in their call for action to tame the yen's rise.
The devastating magnitude 9.0 earthquake and tsunami in March, which killed more than 20,000, knocked Japan into its second recession in three years.
The latest yen rally comes just as manufacturers were getting close to restoring pre-disaster output levels.
The central bank and most private economists have been expecting the world's third-largest economy to return to moderate growth later this year, helped by a recovery in exports and reconstruction spending.
But Japanese officials are increasingly worried that a slowdown in global growth, combined with persistent yen gains, could stall Japan's upturn, even if some are skeptical of intervention given that the yen's rise is mainly a function of a broad weak dollar trend.
Japan last intervened to stem the yen in the aftermath of the March 11 earthquake, when speculation that Japanese investors would sell their overseas assets to fund recovery at home pushed the yen to an all-time high of 76.25.
Back in March, Tokyo acted in concert with its Group of Seven peers, but this time most market players believe Japan would have to go it alone given that the yen's gains were mainly driven by investors spooked by the threat of a U.S. credit downgrade.
Tokyo last acted solo in September 2010, when it returned to currency markets after a six-year hiatus and sold 2.1 trillion yen.
(Writing by Tomasz Janowski; Editing by Nathan Layne and Neil Fullick)
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