Japan sold the yen in the market and its central bank eased monetary policy on Thursday, following Switzerland in efforts to tame currencies buoyed by safe-haven demand from investors fretting about the health of the global economy.
The intervention 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 acted on its own to stem what it considered speculative and disorderly currency moves.
The intervention pushed the yen beyond 79 yen, a two week low, from around 77.10. News agency Jiji said the BOJ had sold up to 900 billion yen in the intervention.
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.
Thursday's action follows a surprise interest rate cut by the Swiss central bank to ease buying pressure on its currency.
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.
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.
A response needed to be taken quickly to head off any further yen strengthening.
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.
CENTRAL BANK MOVE
The Bank of Japan said it will increase the size of its fund for asset buying to 15 trillion yen from 10 trillion yen, among other measures. as it cut short its scheduled two-day meeting that started on Thursday.
The policy move would aim to amplify the impact of yen selling by releasing extra yen funds into the market. It left its rate unchanged at 0-0.1 percent.
The size of the asset buying pool is the main gauge of the central bank's policy since it pledged in October 2010 to keep its rate virtually at zero until the end of deflation, which has plagued the economy for a decade, was in sight.
The central bank also looks certain to leave the intervention unsterilized meaning it would not try to absorb cash that enters the market when the authorities buy foreign currencies.
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 and recovering 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.
Noda declined to comment on the size of the intervention or
say what currencies Japan bought or sold. He would also not say whether Tokyo planned returning to the market, although traders said authorities continued sporadic intervention.
The intervention has knocked the Japanese currency down two yen so far on Thursday. Previous intervention in March this year and September last year moved the unit around 2.8 yen lower, traders said.
Still, analysts doubted a combination of direct yen selling and monetary easing could stem a global shift away from the dollar and other riskier assets.
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.
But analysts also said Prime Minister Naoto Kan's government, beset by record low ratings and struggling to work out the details of a plan for the nation's biggest rebuilding effort since World War Two, was under immense pressure to act.
The government must have wanted to show that it is committed to acting promptly and appropriately before it is too late, said Makoto Nagahori, head of equities at Instinet.
The ECB meets to review policy on Thursday with investors hoping the central bank will signal a more aggressive approach to fighting the euro zone crisis.
While it is expected to leave rates unchanged, there is growing market speculation that President Jean-Claude Trichet may hint at some confidence building measure, such as resuming bond purchases in the market.
I would expect Trichet to try to raise the probability that they may intervene but no more than that, said Gilles Moec at Deutsche Bank.
Japan last intervened in currency markets in concert with the Group of Seven in March, when expectations of fund repatriation after the earthquake pushed the yen to a record high.
Tokyo last acted solo in September 2010, when it sold 2.1 trillion yen.
It may seem ironic that Japan, saddled with public debt twice the size of its $5 trillion economy and struggling with the aftermath of its worst natural disaster in generations, would appeal to risk-shy investors.
However, with the euro area mired in its own debt crisis, Japan's deep financial markets make it one of few viable options, market analysts say.
(Additional reporting by Rie Ishiguro; Writing by Tomasz Janowski)