Japan kept markets on alert for possible yen-selling intervention on Tuesday, with officials saying the currency was too strong and its persistent strength would hurt an economy struggling to recover after the March 11 earthquake.
Finance Minister Yoshihiko Noda signaled that Tokyo was in close communication with European and U.S. counterparts on the yen's strength and repeated his mantra that currency market moves were one-sided.
If the strong yen continues, it will unmistakably impact some industries. I want to closely analyze the potential impact, Noda told reporters after a cabinet meeting.
I am in contact with many different people about this matter, he said, when asked whether Japan was discussing the yen's strength with U.S. and European authorities.
He declined, however, to comment on a Nikkei newspaper report that Washington would approve of yen-selling intervention by Tokyo.
Reinforcing the message, sources familiar with the Bank of Japan's policy thinking told Reuters that if the finance ministry decided to sell yen, the central bank was likely to ease its ultra-loose policy further to amplify the effect of intervention.
If there is intervention, there is a strong chance the BOJ will ease policy, said one of the sources, who spoke on condition of anonymity due to the sensitivity of the mater.
By pumping extra liquidity into financial markets, the central bank would add to the downward pressure on the yen from its direct sales in the currency market.
Some central bank officials are increasingly worried that the global slowdown and persistent yen gains are already hurting business sentiment and clouding the outlook for Japan's economy, which largely relies on exports as an engine of growth.
The yen's overnight ascent near record highs against the dollar has heightened the possibility of intervention to weaken the yen, and for the central bank to follow suit with additional monetary easing.
The Japanese currency came off Monday peaks and traded around 77.45 to the dollar after the U.S. House of Representatives approved a last-gasp deal to raise the U.S. borrowing limit in a crucial step toward averting a catastrophic debt default by the world's largest economy.
But after rising 4.6 percent in the past month the currency was still far above the average 82.59 level Japanese manufacturers have used to make their current earnings forecasts and Noda said the yen's value was still too high.
Japan last intervened to stem the yen in the aftermath of the March 11 earthquake, when speculation that Japanese investors would sell their overseas assets to fund recovery at home pushed the yen to an all-time high of 76.25.
Back in March Tokyo acted in concert with its Group of Seven peers, but this time most market players believed Japan would have to go it alone given that the yen's gains were mainly driven by investors spooked by the threat of a U.S. credit downgrade.
The Nikkei newspaper, however, suggested Tokyo had been in talks with its G7 partners and said Washington would approve of a yen-selling intervention by Japan.
(Writing by Tomasz Janowski; Editing by Nathan Layne)