Japan closely watching forex after yen regains steam

TOKYO (Reuters) - Japan warned on Friday it was closely watching currency markets but stopped short of using stronger language threatening action, a sign the yen's rise to a seven-week high has not alarmed policymakers enough to consider intervening in the market.

Despite the yen's brief rise near levels hit just before the G7 currency intervention on March 18, many analysts suspect intervention by Japanese authorities, let alone joint G7 action, is less likely now with the yen's ascent more moderate than back then, when the dollar tumbled 3 yen in a single day.

Finance Minister Yoshihiko Noda said on Friday he will closely watch movements in foreign exchange and financial commodity markets.

When asked whether Tokyo will discuss the yen's sharp rise with G7 counterparts, he would not comment directly and said: "At this point we will carefully watch (market moves)."

Economics Minister Kaoru Yosano said that while excessive volatility was undesirable, markets should set currency levels.

"Levels are decided by markets," Yosano told reporters. "If you focus specifically on the yen, you could say this move seems more like dollar weakness than a yen rally."

The dollar bounced back to around 80.50 yen on Friday after falling as far as 79.57 yen on Thursday, close to a record low of 76.25 yen hit shortly before G7 economies jointly intervened to stem yen gains on March 18.

BOJ RESPONSE

A sharp rise in the yen could deal a further blow to Japan's export-led economy, which is reeling from the impact of the March 11 earthquake.

But Tokyo may have difficulty garnering G7 support for further intervention unless the yen rises much faster, as was the case shortly after the earthquake, analysts say.

Noda said on Thursday that current foreign exchange moves appear to be different from those seen around the time the G7 intervened in March.

That means that if yen rises persist, the Bank of Japan may come under pressure to loosen monetary policy further to support the economy, some analysts say.

BOJ officials do not rule out easing again if a sharply higher yen, coupled with falls in stock prices, hurts business sentiment and threatens Japan's return to a moderate economic recovery. The central bank's policy review meeting will be held on May 19-20.

The BOJ is also expected to keep flooding markets with cash through its market operations, although it does not see this as an effective way to directly weaken the yen.

Japan's monetary base jumped to a record level in April as the current account balance commercial banks park with the BOJ soared due to the central bank's huge fund injections.

But BOJ officials say the current account balance is expected to fall as the appetite for immediate quake-relief funds wanes.

The BOJ nudged interest rates effectively to zero last year as part of its efforts to pull Japan out of deflation. It also eased monetary policy days after the March 11 quake, by expanding asset purchases, to soothe market jitters.

(Additional reporting by Stanley White; Editing by Chris Gallagher and Edwina Gibbs)