Japan kept markets on edge on Tuesday saying it was ready to step into foreign exchange markets again to curb speculation a day after it sold a record of nearly $100 billion worth of yen to tame its high-flying currency.
Tokyo intervened after the yen repeatedly hit record highs against the dollar, adding to authorities' concerns that excess speculation was driving up the yen and hurting the export-reliant economy if the gains were left unchecked.
Bank of Japan money market data released on Tuesday suggested that around 7.7 trillion yen (62 billion pounds) was sold in Monday's intervention, well above previous record of 4.5 trillion yen set in August.
We are engaging in a war of nerves (with markets) and we will make timely and appropriate decisions, Finance Minister Jun Azumi told reporters after a cabinet meeting.
Following intervention the dollar rallied as high as 79.55 yen on Monday, a three-month peak, after brushing a record low of 75.31 yen.
The U.S. dollar was trading at around 78.08 yen on Tuesday after briefly touching 79.10 yen.
NO DISCORD WITH G20?
Tokyo's second intervention in less than three months and its third this year, followed repeated warnings about the yen's negative impact on the economy and came just ahead of the Group of 20 summit in Cannes, France on November 3-4.
The summit will focus on Europe's efforts to contain its sovereign debt crisis and avoid a repeat of the financial shock that roiled markets after the Lehman Brothers collapse in 2008.
But many market players had thought Tokyo would hold fire before the talks, worried that an intervention may irk its G20 partners as they grapple with sagging growth and exports.
However, Azumi argued that Tokyo's action was justified in the light of last month's G20 statement warning that excess currency volatility hurt economic and financial stability.
I will tell them exactly what has happened. That is, (the yen) has not reflected economic fundamentals ... We acted based on my sense of crisis and our national interests, Azumi said.
The Japanese authorities have been voicing growing alarm at the yen's climb fuelled by concerns about Europe's debt crisis and U.S. economic health rather than optimism about Japan's prospects as it still recovers from the March earthquake and tsunami.
Currency trades are settled two days after the transaction and the BOJ's projection for Wednesday's money market conditions showed there will be 7.68 trillion yen in payments to banks from the public sector, which is a good indication of the size of the intervention.
Traders said the intervention helped exporters offload dollars at a better rate and that there was some demand for dollars from Japanese banks.
But they cited a swathe of dollar sell orders above 78.50 yen and options market showed bets on the yen's gains against the dollar on a one-month horizon had not eased significantly, reflecting the market's belief that the impact of intervention would not last more than a few weeks.
The big scale of yen sales and the authorities' ability to keep the dollar steady around 79.20 yen for an extended period spurred speculation that Japan might follow Switzerland's lead and try to defend a certain level with unlimited intervention.
But most market players dismissed such a scenario as too costly and difficult for an economy and market of Japan's size.
We do not anticipate any form of 'policy floor' in dollar/yen to be adopted along the lines of the Swiss National Bank, as Japan's economic exposures are far more different and authorities have more tools at their disposal, UBS strategists said in a note.
(Additional reporting by Antoni Slodkowski and Stanley White; Editing by Tomasz Janowski)