Japan sold one trillion yen ($12.5 billion) and loosened its monetary reins on Thursday, joining Switzerland in efforts to tame currencies buoyed by safe-haven demand from investors fretting about the deteriorating health of the global economy.

Japan's intervention, which it continued in London trading hours, pushed the yen to a three-week low of 80.20 per dollar from around 77.10, a more extensive yen move compared with intervention in March this year and September 2010.

Tokyo's action followed days of official warnings that the yen had risen so much that it threatened to derail Japan's recovery from the destruction wrought by the March 11 magnitude 9.0 earthquake, a deadly tsunami and an ensuing nuclear crisis.

Finance Minister Yoshihiko Noda said Japan had consulted its international partners, but intervened on its own to stem what it considered speculative and disorderly currency moves.

Hours later, the Bank of Japan joined the fray, boosting funds for buying financial assets to 15 trillion yen from 10 trillion yen, under a scheme established in October 2010 to shore up market confidence and support the economy.

The central bank seems to be working in sync with the finance ministry, and that is different from past times when they eased policy, said Koichi Ono, senior strategist at Daiwa Securities Capital Markets. It's a message that they are willing to act to stop the yen from appreciating further.

Analysts doubted though that even a combination of yen selling and monetary easing could stem a global shift away from the dollar and other riskier assets if Tokyo were to continue acting on its own.

The yen's advance reflects the difficult economic and fiscal situation of both the U.S. and the euro zone, so even if Japan intervenes in the market, it won't be able to combat the yen's rise in the long run on its own, said Takashi Kamiya, chief economist at T&D Asset Management Co.

Indeed, Japan's Economy Minister Kaoru Yosano pressed on Thursday for Group of Seven and Group of 20 officials to discuss currencies as a global issue.

The coordinated action with the central bank was important for Prime Minister Naoto Kan and his government, beset by poor ratings and struggling with the aftermath of Japan's worst disaster in generations and the world's gravest nuclear crisis since Chernobyl 25 years ago.

Japan is just in the process of recovering from a natural disaster, so these currency moves are certain to have a negative impact on the economy and financial markets, Noda told reporters in justifying the intervention.

SWISS TRIGGER

Traders said Japan had sold more than one trillion yen in intervention so far on Thursday, a day after the Swiss central bank surprised markets by cutting interest rates to try to weaken the Swiss franc.

Investors have seen the Swiss franc and the yen as a safer refuge among G10 currencies from a deepening euro debt crisis and speculation that the U.S. economy could be slipping into recession and could lose its coveted AAA credit rating.

Analysts said the Swiss rate cut may have influenced the timing of Japan's move, which surprised some traders because the yen had backed off levels close to a record high of 76.25 per dollar, which was hit shortly after the March quake.

Yesterday's monetary easing by Switzerland provided the push because if Japan didn't respond this would push the yen still higher, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.

The moves by Switzerland and Japan could now put pressure on the European Central Bank, which reviews policy on Thursday, to resume bond buying or other measures, since the euro zone crisis is a major factor behind the rise in the franc and yen.

Other bold policy maneuvers could be in the pipeline, said Gareth Berry, foreign exchange strategist at UBS in Singapore.

'NEVER SAY NEVER'

The Bank of Japan cut short its scheduled two-day meeting that started on Thursday to announce the easing of policy. It left its benchmark rate steady at 0-0.1 percent.

With rates pegged near zero, the central bank has been using the size of the asset buying pool as the main gauge of its policy stance.

The release of extra funds in addition to cash spent on foreign currencies is seen as a way of making the intervention more effective by boosting yen supply.

Asked whether the central bank would do more, Governor Masaaki Shirakawa said:

We think we took enough steps after carefully examining economic and price developments as well as the risks to the outlook. Having said that, the economy is a living thing. We central bankers tend to say: 'Never say never.'

Until recently the central bank has sounded confident that it had done enough to support the economy and that Japan would exit recession later this year with the help of reconstruction spending following the March disaster and a recovery in exports.

But the yen's nearly 5 percent climb over the past month cast doubt on such a scenario and both the government and the central bank have been under growing pressure from Japanese exporters, including Toyota Motor Co, to tame the currency.

The yen selling gave a lift to export shares in Tokyo trading and lifted the Nikkei average off five-week lows.

Noda would not give away any details of Thursday's action, but traders said authorities continued sporadic intervention, including in London. Some said it could eventually add up to a similar amount as 2.1 trillion Tokyo sold in its last solo intervention in September 2010.

($1=79.90 yen)

(Additional reporting by Rie Ishiguro and Kaori Kaneko; Writing by Tomasz Janowski; Editing by Neil Fullick)

Japan