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UPDATE 4-Japan finmin back pedals on strong yen remarks

(For more stories on the Japanese economy, click [ID:nECONJP])

* Finance Minister: fx moves becoming one-sided on yen rise

* Fujii adds never said he would leave yen rise as it is

* Yen hits 8-mth high of 88.23/dlr as no intervention seen

* Intervention unlikely unless dlr below 87 yen--analyst

* Tokyo stocks fall to 2-mth low as yen rise hurts exporters (Adds comments, background)

By Tetsushi Kajimoto

TOKYO, Sept 28 (Reuters) - Japanese Finance Minister Hirohisa Fujii back-pedalled on support for a strong yen on Monday in the latest flip-flop that failed to dispel speculation the new government was unlikely to intervene in foreign exchange markets.

Fujii, who has said recently that a stronger yen could benefit the economy, said recent moves in currency markets had been a bit one-sided and that it was wrong to see his comments as a licence to push the yen higher.

“Some people in the markets are distorting my comments. At the root (of the yen’s rise against the dollar) is a U.S. policy. But markets will correct themselves soon,” Fujii told reporters.

The remarks came just hours after Fujii told Dow Jones newswires that current moves were “not abnormal” and added that “foreign exchange dumping” to defend Japanese exporters would be wrong, helping the yen hit 88.23 per dollar, its highest since January when it spiked to a 13-year high of 87.10.

Markets have been speculating that the new Democratic Party government’s promise to focus its policies more on the domestic economy will make it less inclined to help exporters by intervening agains the yen.

One analyst said Fujii’s comments only served to encourage speculation.

“His remarks themselves may be quite right, but he didn’t need to make them at this time as his unnecessary comments have accelerated the yen’s rise,” said Koji Fukaya, senior currency strategist at Deutsche Securities

EXPORTERS HIT

The strengthening yen hit shares of Japan's big exporters, pushing the Nikkei share average .N225 down below 10,000 for the first time in two months.

The head of Japan’s main business lobby, Fujio Mitarai, said a yen trading in the 80s against the dollar would hurt corporate earnings in the near-term.

Fujii further sought to contain the market fallout from his earlier comments, telling a seminar on Monday that he had never said he would leave a yen rise “as it is”.

“In the (early September G20) summit in London, they agreed that competition for currency devaluation should not be allowed. I completely agree as that’s a lesson from the experience before World War Two. But that’s not to say I approve of the yen’s rise,” Fujii said.

The minister said earlier this month that a strong yen was generally good as it boosted the purchasing power of the Japanese. [ID:nT112846]

He has also said he opposed intentional weakening of any currency, suggesting Tokyo would refrain from stepping into the market to stem the yen’s rise [ID:nN25518058] and that exchange rates must be dictated by the market and that recent rises were not rapid. [ID:nT286998]

On Monday, when asked whether he would consider intervening to weaken the yen, Fujii said: “I should not comment on that.”

Despite his latest efforts to restore a sense of uncertainty about the authorities’ response to the yen’s rise, analysts saw no immediate threat of government action.

“I think he was getting worried a little bit that his comments seemed to be driving the yen higher. But there’s another question whether he will intervene in markets,” said Naoki Murakami, chief economist at Monex Securities.

Deutsche’s Fukaya said an intervention was unlikely unless the U.S. currency hit a new low below 87 yen.

YEN SHORTS CRUMBLE

The U.S. dollar was pushed down against the yen as investors unwound short yen positions. [FRX/ FXNEWS

“Continued speculation that they will not intervene has led to capitulation of short-yen positions, led by the sterling/yen cross,” said Sue Trinh, senior currency strategist at RBC Capital Markets.

Japan’s top financial diplomat, Rintaro Tamaki, declined to comment on foreign exchange moves.

Tamaki, who is vice finance minister for international affairs, told reporters he was in close contact with Fujii.

In the past, Japan intervened to weaken the yen to help its exporters stay competitive.

But Tokyo has not intervened in the currency market since March 2004, after a 15-month-long, 35 trillion yen ($392.6 billion) selling spree aimed at preventing the yen’s strength from snuffing out an economic recovery. (Additional reporting by Hideyuki Sano; Editing by Tomasz Janowski) ($1=89.14 Yen)

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