The Bank of Japan supplied dollars in market operations on Wednesday for the first time in more than a year, a sign of the global market strains that board member Sayuri Shirai separately said could push the yen higher again.
Dollar funding has become increasingly tight in money markets globally as uncertainty over bank exposure to the euro zone debt crisis raises fears of a new credit crunch.
Japan had been immune to these concerns as the Bank of Japan's operations to supply unlimited amounts of dollars went untapped since July last year. Money markets in Japan have been largely stable.
But on Wednesday, the central bank supplied $2 million for a week in one operation and $100 million for three months in a second operation. Bankers speculated the currency was likely sought by a non-Japanese bank with operations in the country.
This is probably a foreign bank trying to secure funds for the end of the year, said Tomohiko Katsu, deputy general manager of the asset liability division of Shinsei Bank.
Europe's debt woes are behind a widening in money market rates. Some banks will have to rely on funding from central banks.
The BOJ's fixed-rate dollar operation, in which it offers unlimited amounts of dollars against collateral, rarely draws bids because it usually costs more than borrowing dollars in the open market.
However, dollar-funding costs have risen in Japan reflecting market jitters over Europe's debt crisis, making it cheaper for banks to raise dollars under the BOJ's operation.
A call by the Greek prime minister for a national referendum on the euro zone's latest measures to reduce Greece's debts provided the latest reason for markets to swoon.
Stocks have wiped out all the gains they made last week in a relief rally after EU leaders drew up the measures.
Global markets are likely to remain under intense strain because there is little chance that Europe's debt problems will be resolved soon, BOJ policymaker Shirai said.
She said Greece was in a negative spiral as taking additional steps to reform its public finances came at the cost of further weakness in its economy.
The euro zone debt crisis posed risks to Japan's economy because it could spur further gains in the yen, which authorities sold heavily this week after it rose to a fresh record high against the dollar.
As domestic and overseas markets become increasingly interconnected, prices of equity and other risk assets may fall globally as investors seek safer assets, she said in a speech to business leaders.
That may lead to falls in Japanese stocks or push up the yen -- regarded as a safe haven -- further against the dollar and emerging currencies.
As a result, the economy could underperform our forecasts as business and household sentiment deteriorate.
The latest flare-up in Europe's debt crisis pushed Japan's Nikkei share average <.N225> down more than 2 percent on Wednesday after overseas shares skidded on Tuesday.
She maintained the BOJ's official view that the world's No. 3 economy is set to resume a moderate recovery, driven by efforts to rebuild from the March earthquake, even if risks were slightly tilted to the downside.
We are in the process of stepping up monetary easing, and the effects will continue to emerge, Shirai said.
Having already cut rates close to zero, the central bank last week eased monetary policy by boosting its funds for asset purchases to 20 trillion yen ($255 billion).
The BOJ next meets to review rates on November 15-16.
If the yen rose again or there was another credit crunch, then the BOJ couldn't afford to sit idly by, said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
On Monday, Japan sold nearly $100 billion worth of yen -- a record amount for single-day intervention -- to tame its high-flying currency.
Shirai, speaking to reporters after her speech, declined to comment on the intervention but said the central bank was watching the impact on sentiment of a strong yen.
The BOJ will refrain from draining the funds that enter the market through the yen-selling intervention, a central bank source said.
The so-called unsterilized money will effectively expand monetary easing, at least in the short term. But analysts say its effect on curbing yen strength and supporting the economy will be limited because policy rates are so low.
Shirai, a former IMF economist, joined the BOJ board in April as its only female member. Previously a professor of economics and policy at Tokyo's Keio University, she is considered one of the board's more pessimistic members on the economy.
(Reporting by Rie Ishiguro; Editing by Edmund Klamann)