The Bank of Japan on Tuesday continued to flood the money market with cash while top policymakers sought to contain a sharp sell-off in Tokyo stocks with reminders they kept a close watch over market moves and assurances about the economy's overall health.
Japanese shares plunged 10.55 percent, the largest fall since October 2008, as more explosions rocked a quake-stricken nuclear plant, triggering a rise in radiation and prompting investors to dump riskier assets across Asia.
The yen rose on Tuesday, sparking market speculation that the authorities might intervene to prevent the currency's strength from further damaging an economy reeling from a triple blow of Friday's 9.0 magnitude earthquake, a tsunami and an escalating nuclear crisis.
While the dollar spiked up at one point, Finance Minister Yoshihiko Noda declined to comment on whether Tokyo stepped into the market and traders later dismissed the dollar's rise as a result of a one-off trade.
A senior government official also told Reuters speculation was behind sharp movements in the currency and stock markets.
We will continue to monitor the market, Noda told reporters.
The comments signal that Tokyo is not ready to step into the market just yet, but wants to keep speculators on guard and prevent them from pushing up the yen.
The central bank, for its part, eased its policy on Monday by doubling to 10 trillion yen a fund earmarked for purchases of assets such as government and corporate bonds in hopes that together with money market cash injections will improve sentiment, since it lacks the authority to directly buy shares to prop up prices.
Under the scheme, the central bank can buy exchange-traded funds, or trust funds investing in stocks, but the money set aside for such purchases is far too small to make a sizable impact on Japan's stock market.
The BOJ on Tuesday offered to pump 8 trillion yen ($98 billion) into the banking system, continuing its huge fund injection aimed at easing market jitters in the face escalating nuclear crisis and fears of unprecedented damage from the earthquake.
The auction, which follows a record 15 trillion yen the BOJ offered in same-day market operations on Monday, drew bids of 5.4 trillion yen.
Japan's production and the economic power have not fallen. I think the market confusion will calm down in a short time, Economics Minister Kaoru Yosano told a news conference after a cabinet meeting.
Still, he suggested that the government could downgrade its assessment on the economy this month by saying that its next monthly report, due out on Friday, will focus on analyzing impacts of the quake and nuclear accidents.
Noda said the stock market was falling in response to temporary factors and though he was watching market moves closely he expressed optimism that the Japanese economy would continue to improve.
However, markets gripped by fear that the nuclear emergency could escalate, paid little heed to such assurances and Nikkei futures traded in Osaka tumbled more than 16 percent at one point after Japanese Prime Minister Naoto Kan said radiation levels had become high around the damaged nuclear power plant.
Our basic view is that the Japanese economy was in doldrums late last year but it has been gradually improving... The Bank of Japan and the government are doing utmost to forestall damage to the economy, Noda said.
Japan can intervene in the currency market but does not have authority to buy stocks directly from the market.
That means there is not much policymakers can do to prop up stock prices beyond verbal reassurances that Japan has the quake damage under control and that its economy remains in good shape.
The government on Monday tapped 30 billion yen from the 200 billion yen in reserves set aside for disaster relief in the budget for the current fiscal year ending in March.
Noda said the government has ample funds to meet near-term costs of quake relief. But he stopped short of saying whether an emergency budget will be compiled and if so, when, stressing that the government first needed to estimate how much spending would be needed to cope with the devastation caused by the triple blow of a massive earthquake, a tsunami and a deepening nuclear crisis. ($1=81.66 Yen)
(Additional reporting by Kaori Kaneko and Tetsushi Kajimoto; Editing by Edmund Klamann and Tomasz Janowski)