WRAPUP 2-Japan escalates warnings on yen rise to protect recovery

Fri Jul 29, 2011 12:59am EDT

 * Finmin Noda says weighing how long Tokyo can keep yen rise
"unattended"
 * Sources say still no full agreement on whether and when to
intervene
 * Will take appropriate action in cooperation with BOJ -
Noda
 * BOJ official says focusing on yen rise harm to economy
 * Factory output up 3.9 pct in June, confirms recovery on
track

 (Updates markets, add sources)	
 By Leika Kihara	
 TOKYO, July 29 (Reuters) - Japan on Friday escalated its
warning to financial markets against testing the yen's upside
further, with the finance ministry signalling that Tokyo may not
wait for too long with action if the currency keeps climbing.	
 In his strongest threat of intervention so far, Finance
Minister Yoshihiko Noda said that the yen was rising "too much"
and deviating from Japan's economic fundamentals.	
 "Our stance is clear. We will take decisive action against
excessive exchange rate volatility," Noda told parliament.	
 "I'd like to carefully examine how long we can leave current
(exchange-rate) moves unattended."	
 Markets feel that Tokyo's verbal warnings have reached a
higher pitch and see intervention as a real possibility, but not
until the yen accelerates toward its record high against the
dollar.	
 With the yen's rise driven by factors beyond Japan's control
such as the U.S. debt crisis, there is still no full agreement
among monetary authorities on whether and when to intervene,
sources familiar with the government's exchange-rate policy say.	
 The likelihood of action may depend on the outcome of a
tussle between government officials sensitive to business
complaints who would prefer swift action, and those who work
with G7 partners and are hestitant of stepping in too hastily,
said one of the sources who spoke on condition of anonymity.
Another source confirmed this view.	
 Any currency intervention would increase the chance of the
Bank of Japan following up with monetary easing, as was the case
when Japan last intervened on its own in September, the sources
said.	
 In a nudge towards the Bank of Japan, Noda said he hoped to
take appropriate action "in cooperation" with the central bank,
to address the currency's rise that was hurting exporters and
threatening Japan's recovery from damage wrought by the March 11
earthquake and tsunami.	
 Data on Friday showed factory output rose further in June
and manufacturers expected more gains in July and August that
would bring production close to pre-quake levels, but economists
said the yen's rise was clouding the outlook. 	
 	
 Policymakers' repeated verbal warnings have not prevented
the dollar from sliding toward the record low of 76.25 yen
 struck in March on fears of a U.S. debt default or credit
downgrade.	
 It hit another four-month low of 77.48 yen on Friday morning
after Republican Representative Kevin McCarthy said the House of
Representatives will delay a vote to raise the U.S. debt
ceiling.	
 A senior BOJ official said the central bank was focusing on
how recent yen rises could affect a still fragile economic
recovery, suggesting its readiness to ease monetary policy
further as early as next week if the yen climbs further.	
 	
 SOLO ACTION	
 Markets rule out a repeat of the co-ordinated intervention
that the Group of Seven carried out in the aftermath of the
March quake, but some see solo action by Tokyo as a possibility.	
 Japanese policymakers, alarmed at the persistent nature of
yen rises amid broad-based weakness in the dollar, see solo
action as an increasingly viable option, although markets are
sceptical how long its effect would last. 	
 "Noda's verbal warning has escalated slightly," said
Michiyoshi Kato, senior vice president at forex sales at Mizuho
Corporate Bank.	
 "It's not about dollar/yen levels alone. Authorities are
probably also watching stock markets. If the U.S. debt problem
triggers risk aversion and pushes the yen up suddenly, and if
that increases worries about the impact on Japan's economy,
Tokyo may act."	
 Policymakers who are hesitant about intervention have
pointed to the resilience of the stock market as a sign that the
damage to the economy has been contained so far.	
 But the Nikkei average fell below the
psychologically important 10,000 mark on Friday and business
lobbies have started to complain more vocally about the
government's inaction over the strong yen. Noda said he was
aware of business concerns.	
 The BOJ feels the yen rise has yet to severely undermine
business sentiment but is prepared to ease policy further next
week if the standoff in U.S. debt talks roils global markets.	
 "We need to watch out for the negative impact yen rises
could have on the economy through exports, corporate revenues
and a worsening of business sentiment," BOJ Executive Director
Masayoshi Amamiya told parliament on Friday.	
 Japan's economy is expected to exit recession and grow
moderately in July-September as companies make steady progress
restoring supply chains hit by the quake.	
	
 (Additional reporting by Tetsushi Kajimoto, Stanley White, Rie
Ishiguro and Kaori Kaneko; Editing by Tomasz Janowski)	
 
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