June 1, 2012 / 2:47 AM / 7 years ago

Japan steps up intervention warnings as yen climbs

TOKYO (Reuters) - Japan on Friday stepped up warnings that it could intervene in the foreign exchange market if excessive yen rises continue, with the country’s top currency diplomat threatening action even if U.S. and European partners were not on board.

Japan's Finance Minister Jun Azumi scratches his head during a news conference after the 15th ASEAN plus 3 Finance Ministers and Central Bank Governors' meeting in Manila May 3, 2012. REUTERS/Romeo Ranoco

Takehiko Nakao, vice finance minister for international affairs, said it was becoming more obvious that current yen rises were being driven by speculators and warned that Tokyo was ready to intervene should such moves continue.

“Although there might be differences (in views with the United States and European countries) from time to time, the Japanese government is determined to take an immediate response to volatility in the currency market,” he told a Euromoney forum.

“Monetary policy is important, but we shouldn’t exclude the possibility of taking our response in the market, which is intervention,” he said.

Nakao’s remarks were the most direct warning of intervention by Japanese policymaker since the yen began to creep up again on safe-haven demand amid worries about Europe’s deepening debt crisis, and came on the heels of similar comments by Finance Minister Jun Azumi earlier in the day.

“It is clear that the current one-sided currency moves do not reflect the economy’s fundamentals,” Azumi told a news conference after a cabinet meeting.

“We will need to take decisive action if excessive currency moves continue.”

The warnings came as the yen climbed to another 3-1/2 month high against the dollar of 78.21 overnight and an 11-1/2-year high against the euro of 96.48 on the escalating euro zone debt crisis and weak U.S. economic data. <MKTS/GLOB>

Japanese policymakers have used the phrase “decisive action” in the run-up to previous market intervention, but it is rare for them to directly mention the word “intervention” when warning of action in the currency market.

The warnings caught traders’ attention though Tohru Sasaki, head of Japan rates and currency research at JPMorgan Chase Bank in Tokyo, thought it seemed too early for the authorities to pull the trigger.

“I don’t think authorities will intervene at this stage. Dollar/yen volatility is low compared with the euro/dollar. Both currencies are gaining against the euro so intervention would not win understanding from the United States, which criticized Japan’s intervention last year given low volatility in the dollar/yen,” he said.

“If volatility accelerated and pushed the dollar towards its record low of 75.31 yen in a short span of time, say next week, Japan could intervene. But the possibility of intervention would depend on volatility, not levels.”

BOJ UNDER PRESSURE AGAIN

Tokyo spent a record 8 trillion yen ($101 billion) in unilateral intervention into the currency market last October 31, when the dollar hit its record low against the yen, and another 1 trillion yen in early November on undeclared forays into the market. Authorities have stayed out of the market since then.

The government is keen to shield Japan’s export-reliant economy from adverse effects of the strong yen at a time when it faces difficult negotiations with opposition parties on a planned hike in the sales tax.

The yen’s rise will put the Bank of Japan under pressure to ease monetary policy further when its policy board meets this month, although the central bank would prefer to stand pat for now after having acted in February and April via increases in asset purchases.

Japanese exporters won a rare reprieve after the February easing which coincided with signs of improving health of the global economy and drove the yen to 11-month lows against the dollar.

But since April the yen has resumed creeping upwards on more euro zone turmoil due to fears that Greece’s may leave the euro and more recently that Spain will require a bailout, as well as concerns that the global economic recovery is running out of steam.

Many in the BOJ feel little need for further action and want to save their limited policy options for later unless Europe’s deepening debt crisis triggers a yen spike to new records and derails Japan’s recovery prospects.

Writing by Leika Kihara; Editing by Tomasz Janowski and Edwina Gibbs

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