Japan said on Friday it will boost its currency intervention fund and keep watching dealers' trading positions in yet another effort to tame the yen in the face of growing evidence that its strength is stalling the economy's post-quake rebound.
August industrial output and other data showed Japan's swift recovery from the March 11 earthquake and tsunami was tailing off under the weight of the yen's strength and faltering global growth.
Finance Minister Jun Azumi said the government would authorize a further 15 trillion yen ($195 billion) for market interventions, effectively increasing the amount available to a record 46 trillion yen.
He also said the government will maintain for two more months monitoring of currency traders' daily positions put in place last month to discourage speculative bets on the yen's rise.
The yen has held broadly steady against the dollar at around 76-77 yen since Tokyo bought a record 4.5 trillion yen worth of currencies on August 4, but the currency continued to rise against the euro and currencies of its Asian rivals.
And with the yen still within striking distance of its all-time high of 75.94 against the dollar, Tokyo is clearly alarmed that its exporters are ill equipped to cope with such persistent yen strength.
The recent 75- to 80-yen range could pour cold water on the Japanese economy's recovery, Azumi told reporters, a clear signal that not only sharp market moves, but the very levels at which the yen has been trading was a concern.
The currency market showed little reaction, though, with one traders describing Azumi's warnings as posturing.
Some players said, however, boosting the war chest would serve as a reminder that intervention was a possibility.
Boosting forex intervention fund is to send the message to the market that Japan will not have immediate trouble if it intervenes, said Masafumi Yamamoto, chief currency strategist at Barclays Capital.
The yen's strength, driven at times of financial turmoil by safe-haven flows attracted by Japan's deep and liquid markets rather than its own economic performance, poses a major headache for Prime Minister Yoshihiko Noda and his cabinet.
Noda, who took over this month as Japan's sixth premier in five years, must oversee the nation's biggest rebuilding effort since the aftermath of World War Two while reining in public debt twice the size of the $5 trillion economy.
Sustaining economic growth is essential for such a balancing act to succeed, but the latest data showed that after a swift recovery that brought August output near pre-disaster levels, further growth was far from assured.
Industrial output inched up 0.8 percent in August compared with a 1.5 percent market forecast. Manufacturers surveyed by the government ministry expect output to fall 2.5 percent this month before rebounding 3.8 percent in October, but some analysts thought that forecast was too optimistic.
A purchasing managers' survey for September, which marked the first contraction in manufacturing activity in five months, confirmed that the swift post-disaster bounce in the world's No. 3 economy was tailing off quickly.
The slowdown is coming at a time when the government is debating tax increases to help cover the nearly 17 trillion yen ($221 billion)cost of rebuilding areas ravaged by the March disaster and there are growing concerns that the economy may stall before reconstruction spending kicks in.
Following last month's intervention, which combined with Bank of Japan easing managed to snap, at least temporarily, the yen's climb, the government has come up with several steps aimed at mitigating the strong yen's impact.
Those included a $100 billion credit line for companies investing overseas, as well as plans for subsidies for firms building factories in Japan and more funding to encourage overseas acquisitions.
Those were, however, greeted with skepticism over whether the scale would be sufficient to offset the drag on corporate earnings and growth.
Japan's auto industry remained one of the few bright spots as auto makers have maintained output to restock inventories overseas and orders yet to be met due to output delays caused by the earthquake. But the IT sector has been hurt by slowing global demand for personal computers and semiconductors.
Toyota Motor Corp, the world's biggest auto maker, said on Wednesday its exports rose 19.8 percent in August from a year earlier, with output in Japan during the month up 11.9 percent.
The Bank of Japan is expected to debate whether additional monetary easing will be necessary when it meets for a rate review on October 6-7, after it loosened policy in August to forestall risks to the outlook.
($1 = 76.840 Japanese Yen)
(Additional reporting by Stanley White and Kaori Kaneko; Writing by Tomasz Janowski; Editing by Kim Coghill)