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

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By Masayuki Kitano

TOKYO Aug 26 (Reuters) - The yen's surge to a 15-year high against the dollar is threatening Japan's struggling economy, hitting the Nikkei share average and prompting Japanese authorities to consider unilateral intervention for the first time in six years.

While government sources have told Reuters they are not ruling out intervention, traders and analysts believe that the drop in dollar/yen JPY= would have to turn much more volatile for the authorities to take action.

The yen's rise is adding to deflationary pressures on the Japanese economy, and the toll on shares of exporters has driven the Nikkei .N225 down 16 percent -- making it one of the worst performing markets in the world this year next to China and Greece.

WHAT WOULD PROVOKE INTERVENTION?

A sharp drop in dollar/yen, such as 1 to 2 percent or more in a single day towards the 80 yen level and below, is seen as the most likely scenario that would prompt Japan to stick its neck out and buy dollars.

Such an abrupt currency move would likely drag the Nikkei down even further, piling up pressure on the government to take action. Suzuki Motors (7269.T) CEO Osamu Suzuki said on Thursday that he hoped the government would hear "our cries of desperation".

Half of the Nikkei's 16 percent drop so far this year has come during the yen's steady rise in August.

But 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 to a 15-year low 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 realised volatility are up only modestly after having dropped to their lowest levels since 2007, just before the global financial crisis began. For a graphic on dollar/yen implied and realised volatilities, click on: r.reuters.com/bux96n.

Similarly, implied volatility on one-month dollar/yen options edged up to 12.65 percent JPY1MO= 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.

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 CNY=CFXS 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 is not as quick to intervene as it used to be, partly due to a seeming shift of views within the Ministry of Finance on the effectiveness of intervention.

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.

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 -- driving down U.S. Treasury yields.

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, where $1.7 trillion changes hands in London alone each day, on average.

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 from the currency purchased in intervention may make 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. [ID:nTOE67N07Z]

But Japanese Finance Minister Yoshihiko Noda hinted on Wednesday that intervention had not been ruled out, when he said recent yen moves were one-sided and Tokyo would respond appropriately when necessary. [ID:nTKU106216] ($1=84.14 Yen, 1.031 Swiss Franc) (Additional reporting by Kaori Kaneko, Rika Otsuka and Hideyuki Sano; Editing by Eric Burroughs and Edmund Klamann)