Q+A: Will Japan intervene to curb yen's rise?

TOKYO (Reuters) - The yen has surged to a 15-year high against the dollar as worries about the global economic outlook drive down U.S. Treasury yields and hit shares, and this is prompting Japanese authorities to consider unilateral intervention for the first time in six years.

The yen's rise is adding to deflationary pressures on the Japanese economy and pummeling Tokyo shares, forcing officials in Tokyo to consider intervention as one weapon to break the vicious circle of selling that has pushed the Nikkei share average .N225 to a 16-month low.

Japan is not ruling out intervention to curb the yen's rise, government sources said on Wednesday, sending the strongest signal yet that the currency's rise back near all-time highs may spur action.

WHAT WOULD HEIGHTEN INTERVENTION JITTERS?

Market players say the Nikkei's slide does mean that the government and the BOJ could face heightened political pressure to take steps to curb the yen's rise, which is reinforcing a vicious circle of yen buying and share selling.

Half of the Nikkei's 16 percent drop so far this year has come during the yen's steady rise in August, making it one of the worst performing major markets globally.

But traders say the yen's rise would likely have to speed up for authorities to become seriously concerned. Even as the yen reached a high of 83.58 against the dollar, its moves have not been very volatile.

Tuesday's drop in dollar/yen was 1.3 percent, bigger than usual but paling in comparison to the 3.6 percent plunge in May during the Wall Street "flash crash." During the massive yen carry trade unwind in 1998, dollar/yen plunged nearly 7 percent in a single day.

For that reason, volatility gauges are subdued, and some measures of realized volatility are up only modestly from their lows hit after the financial crisis began in 2007. For a graphic on dollar/yen implied and realized volatilities, click on: r.reuters.com/bux96n

Similarly, implied volatility on one-month dollar/yen options edged up to 12.65 percent on Tuesday, matching a peak hit around mid-July but well off a one-year high of 18.4 percent scaled in May.

Currency traders have hardly been impressed by the pace of the yen's rise.

"Market volatility is low and the yen's rise is still on a gradual pace. The market is not in the mood to make a fuss about it at the moment," said Akira Hoshino, chief manager for foreign exchange trading at the Bank of Tokyo-Mitsubishi UFJ.

Japanese Finance Minister Yoshihiko Noda said on Wednesday that recent yen moves were one-sided and Tokyo would respond appropriately when necessary.

Japan may thus have a hard time convincing its G7 partners about the need to intervene just when they are calling on China to make its yuan more flexible to ease global imbalances.

Any attempt to cheapen the yen could run counter to U.S. President Barack Obama's plan to double U.S. exports, especially with mid-term congressional elections approaching in November, raising diplomatic obstacles to intervention by Tokyo.

HAS JAPAN ABANDONED ITS OLD INTERVENTIONIST WAYS?

Japan's authorities haven't intervened since March 2004, when a 15-month yen-selling spree came to an end.

During that period, they sold 35 trillion yen ($416 billion), the equivalent of more than one-third of the annual budget, to try to stop a rising yen from harming exports and to fight deflation.

Even a rare G7 statement between meetings in October 2008, which singled out yen volatility and was seen as giving Japan approval to intervene, did not tempt Tokyo.

Many analysts also think intervention would amount to little more than a drop in the ocean, since the driving force behind the yen's rise is mounting worry that the U.S. economy is headed for a double-dip recession and the Federal Reserve may boost quantitative easing.

In terms of volume, the amount of dollar buying in currency intervention would only be a small fraction of trading on the world's massive foreign exchange markets.

In the 2003-2004 intervention, the score card was mixed at best as the yen continued to gain gradually during the campaign.

Fear of losses could also make Tokyo reluctant. The Swiss central bank, which intervened heavily to curb strength in the Swiss franc this year, has faced criticism for losing $13.6 billion on its intervention.

SO IS INTERVENTION OUT OF THE QUESTION?

Not entirely, but perhaps only if officials feel the need to get more aggressive.

Many market players expect Tokyo's efforts to thwart yen gains would focus on monetary policy.

Sources familiar with the matter said the yen's rise to a fresh 15-year high against the dollar on Tuesday raised the chances that the BOJ may call an emergency meeting to ease policy further before its next scheduled policy review in two weeks.

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.

($1=84.14 Yen, 1.031 Swiss Franc)

(Additional reporting by Kaori Kaneko, Rika Otsuka and Hideyuki Sano; Editing by Edmund Klamann)