Japanese Finance Minister Yoshihiko Noda warned on Thursday that recent yen strength does not reflect economic fundamentals, escalating a verbal campaign to cool the rising yen although traders saw little immediate chance that authorities would intervene directly in the market.
The dollar tumbled to a four-month low against the Japanese currency after Federal Reserve Chairman Ben Bernanke on Wednesday signaled that the central bank was ready to ease monetary policy further if economic growth and inflation slow much more.
The movement doesn't reflect fundamentals and has been one-sided, Noda told reporters on Thursday regarding the yen's recent surge.
It would be troublesome if it persists, and I will continue to closely watch markets.
The warning was somewhat sharper than the previous day's, when the finance minister said recent yen rises had been a little one-sided. Noda made no comment about possible intervention in the financial markets.
His comments failed to stem the yen's rise, with the dollar slipping to a fresh four-month low of 78.45 yen.
The yen has been climbing as investors seek a safe haven from the escalating euro zone debt crisis and mounting doubts about the health of the U.S. economy.
The dollar came under additional pressure after Moody's Investors Service said the United States may lose its top-notch credit rating if lawmakers fail to increase the country's debt ceiling.
Noda has stepped up his warning against the yen's rise as Japanese authorities are getting worried about how much further the currency will strengthen, said Makoto Noji, senior bond and currency strategist at SMBC Nikko Securities in Tokyo.
But it is hard for Japan to intervene in the market, since that sort of beggar-thy-neighbor action would not gain understanding from other countries with four months having passed since the quake.
PRESSURE ON BOJ
Japanese policy-makers are sensitive to a stronger yen as it is seen harming the export-led economy, which was tipped back into recession by the March 11 earthquake and tsunami.
The yen's rise has triggered a series of verbal warnings by Japanese officials, although the market does not believe the chances of imminent currency intervention have risen significantly.
Japanese intervention is less likely to succeed, because we have very negative news about the United States and Europe, said Kimihiko Tomita, head of foreign exchange at State Street Bank & Trust in Tokyo.
Noda has so far refrained from using the sort of stronger wording, such as a warning that Tokyo would take decisive action when needed, that markets would view as signaling intervention may be imminent.
Group of Seven nations jointly intervened to stem yen strength when the Japanese currency spiked to a record high of 76.25 to the dollar in the aftermath of the March quake, on speculation that Japanese firms would repatriate some of their huge foreign assets to pay for reconstruction.
Japan last conducted solo intervention in September of last year, when it stepped into the market for the first time in six years.
The Bank of Japan eased monetary policy on both occasions.
With Japan's economy now recovering steadily from damage inflicted by the quake, Tokyo will have difficulty convincing its G7 counterparts of the need for intervention, even solo action, market players say.
That may mean the central bank will come under more pressure to loosen policy if the yen rises sharply enough to threaten its forecast that Japan's economy will resume a moderate recovery when it shakes off supply constraints in the autumn.
The BOJ's policy action has recently been in sync with the yen's rise, so further policy easing could be possible at its next rate review or later, depending on the yen's movements, said Noji of SMBC Nikko Securities.
The BOJ kept monetary policy on hold and raised its assessment of the economy on Tuesday, encouraged by a rebound in factory output and the prospects for a recovery in business and household sentiment.
But central bank officials admit that a renewed yen spike accompanied by sharp falls in stock prices would be the most likely next trigger for further easing, as such market moves would damage a still fragile recovery in business sentiment.
The BOJ has stood pat since easing credit in March but has expressed its readiness to act if Japan's recovery prospects are threatened. Its next rate review will be held on August 4-5.
BOJ Governor Masaaki Shirakawa warned on Wednesday that yen rises would hurt Japan's economy in the short term, although he stuck to the view that growth will pick up as companies steadily restore their supply chains.
(Additional reporting by Stanley White; Editing by Michael Watson)