Japan may lack the implicit approval of G7 nations to spend big in any future efforts to stem sharp yen rises and will have to rely on limited opportunistic strikes to prevent a build-up of aggressive bets on its currency.
That means that despite all the jawboning, Tokyo's record 4.6 trillion yen ($60 billion) intervention last week is unlikely to mark a start of a long campaign similar to the 35-trillion yen selling spree in 2003.
Japanese policymakers say that Tokyo has gained some consent from the G7 on intervention. But judging from the statement, I doubt that's true, said Yasuhide Yajima, senior economist at NLI Research Institute in Tokyo.
Having said that, I think Tokyo will probably intervene again. Not acting and allowing the yen to renew a record high is not an option for the government.
While Finance Minister Yoshihiko Noda has tried to keep markets on edge by making references to his discussions with G7 partners, it is doubtful there is much sympathy for Tokyo's battle with what is seen as a global currency realignment.
Back in 2003, Japan was the only major economy suffering from deflation and the aftermath of a severe economic slump, making it easier to gain Group of Seven understanding.
At the time, Washington recognized it was in the U.S. interest for Japan's economy to recover enough to pull out of a banking crisis that, if mishandled, could rock global markets.
And in March this year, when the group acted together to weaken the yen after it hit record highs, it was a show of solidarity with a Japan that had just been hit by a massive earthquake, a deadly tsunami and nuclear meltdowns.
Analysts also point out that five months ago, the yen soared mainly on speculation about repatriation of funds to the disaster-stricken nation. This time, it is a broad dollar weakness fueled by concerns about the U.S. economy that is primarily driving the Japanese currency.
Given that large scale interventions may not sit well with international partners while inaction would draw ire from exporters at home, Tokyo may aim for a shock effect by carefully choosing the moment to step in.
Noda has given markets a glimpse of government thinking, noting how events overseas played a role in decisions on when to act, and suggesting that Tokyo may not step in if there was a risk that a market-moving event could weaken the impact.
He has said the government waited until Washington sealed a deal on the U.S. debt ceiling before intervening on August 4. He also signaled that Tokyo kept a close eye on market reaction to the Federal Reserve's policy decision on Tuesday in determining whether any action was needed.
It looks certain that the Bank of Japan will try to maximize the effect of any intervention by refraining from draining the extra yen from the market. The central bank is also ready to supply huge amounts of funds to the market on any signs of stress, sources have told Reuters, and the BOJ may even ponder easing monetary policy further if the economy's recovery is threatened.
The finance ministry, which has jurisdiction over currency policy, can issue about 45 trillion yen in financing bills to secure yen for intervention. That means that even after a series of currency actions taken since last year, it is still left with about 40 trillion yen to spend, plenty to step into the market again.
Tokyo has interpreted a G7 call for coordinated action to ensure market stability in its statement this week as signaling the group's readiness to jointly intervene if currency moves become too volatile.
NO APPETITE FOR JOINT ACTION?
But another customary line in the statement, saying exchange rates should be determined by markets, was taken by markets as a sign that there was no appetite for joint action.
Some even suspect that the group was not happy with Japan's solo act, after European Central Bank President Jean-Claude Trichet said that currency interventions have to be made on the basis of a multilateral consensus.
With joint or big-scale solo action seemingly off the table, markets may get ready for occasional skirmishes, not necessarily at times when the yen is rising sharply.
Noda's latest statement -- that he was thinking about ways of softening the impact of the yen's strength -- also suggested that the government had modest ambitions. It is aiming to prevent yen-buying from turning into a risk-free bet, rather than hoping to weaken the currency in a lasting manner.
It may also seek help from the BOJ, which could ease policy again to limit the strong yen's negative impact on business sentiment.
In fact, the government may want to rely more on the central bank in its efforts to tame the high-flying currency.
Economics Minister Kaoru Yosano said this week Japan should give more thought to the range of quantitative easing steps it uses, while Prime Minister Naoto Kan said he hoped the BOJ will continue to support the economy with easy monetary policy.
($1 = 76.780 Japanese Yen)
(Editing by Tomasz Janowski and Richard Borsuk)