Japan tries to scare off yen speculators

Japan's Finance Minister Yoshihiko Noda attends a fiscal and monetary policies committee at the parliament in Tokyo August 9, 2011.

TOKYO (Reuters) - Japan's finance minister on Tuesday warned speculators against betting on further yen gains that could hinder recovery from the March earthquake, but his chances of keeping them at bay looked in doubt as ultra-easy U.S. monetary policy could keep the dollar weak.

Bank of Japan Governor Masaaki Shirakawa also declared that recent yen rises were driven in large part by speculative activity and would badly hurt the economy, signaling the bank's readiness to ease monetary policy again if the recovery's prospects are threatened.

St. Louis Federal Reserve President James Bullard, in an interview published on Tuesday, said the Fed could increase bond purchases, exchange long bonds for shorter-dated notes or make a commitment on the size of its balance sheet to further stimulate the U.S. economy.

Bullard does not vote on monetary policy, but the fact that a known monetary policy hawk would openly lay out options for a third round of quantitative easing may offer a preview of the Fed's Jackson Hole summit this week.

The yen is hovering not far from a record high of 75.94 to the dollar hit last Friday, prompting warnings from Japanese policymakers and keeping investors wary of possible intervention aimed at weakening the yen.

Depending on the tone that Fed Chairman Ben Bernanke sets at the summit, the dollar could move lower and test Japanese policymakers' resolve.

"Excessive yen strength has adverse effects on Japan's economy just as we are dealing with the damage from the quake," Finance Minister Yoshihiko Noda told a news conference. "I'm closely checking if there are speculative moves behind it."

The BOJ is also on guard and will consider easing monetary policy, possibly before its rate review on September 6-7, if sharp yen rises push down stock prices enough to severely hurt business sentiment, sources familiar with the central bank's thinking have said.

"As a central bank, we are always considering taking drastic and aggressive steps," Shirakawa told parliament on Tuesday.

BOJ READY TO ACT

If excessive yen rises persist, Noda said the government would take steps to help the economy cope, either through a supplementary budget it plans to compile to support post-quake rebuilding, or by tapping an emergency reserve fund earmarked in the current fiscal year's budget.

Tokyo intervened unilaterally in the currency market and eased monetary policy on August 4 but the steps have not stopped investors from seeking the yen as a safe haven against risk.

Markets are bracing for another round of intervention but doubt whether it would be effective in sustainably weakening the yen, particularly with little chance that Tokyo can persuade its G7 counterparts to act jointly in the currency market.

Japan's campaign to weaken the yen is further complicated as ultra-easy U.S. monetary policy is contributing to a broad-based decline in the dollar.

"If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action," Bullard said in an interview with the Nikkei newspaper published on Tuesday.

Recent market turmoil and signs of weaker U.S. growth have boosted expectations that Bernanke may hint at more emergency stimulus in a speech on Friday.

Japan is also under pressure to help its economy recover from the natural disaster and has in the past expressed alarm at speculative bets on yen appreciation.

Shirakawa told parliament that while the BOJ would not aim to influence currency moves with monetary policy, it has taken and will take monetary policy action if market developments derail Japan's recovery from the devastation of the March quake.

Speculators' net long positions in the yen against the dollar stood at 47,348 contracts in the week to August 16, U.S. Commodity Futures Trading Commission data showed.

Just before Japan intervened on August 4, net long yen positions rose to 58,833 in the week to August 2.

(Additional reporting by Leika Kihara; Writing by Stanley White; Editing by Edmund Klamann)