Japan tried to keep yen bulls on guard on Wednesday, with finance minister repeating his warning that he was closely watching markets after the currency shot near record highs early this week.
The yen held broadly steady against the dollar as recent repeated jawboning from Japanese authorities kept markets wary of intervention to weaken the currency while a deal to raise the U.S. debt limit eased the pressure on the U.S. currency.
Finance Minister Yoshihiko Noda said he welcomed the congressional approval of the deal and would monitor market reaction to the agreement that averted a catastrophic default but did not remove the risk of credit downgrades.
I would like to closely watch how markets assess (the U.S. agreement on debt), Finance Minister Yoshihiko Noda told reporters. He declined to comment on whether Tokyo would intervene in the currency market.
Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa may discuss steps to address the strong yen when they meet at a regular gathering of cabinet ministers to discuss risks to the economy, to be held around noon.
Noda and Economics Minister Kaoru Yosano will also be present at the meeting, which Shirakawa will attend as an observer.
Moody's Investors Service said it had confirmed the United States' top AAA rating but assigned it a negative outlook after lawmakers passed a deal to raise the U.S. borrowing limit and reduce the deficit.
The yen hovered around 77.25 to the dollar, after it soared on Monday within a hair's breadth of March's record high at 76.25 to the dollar.
Despite the debt agreement, the dollar was unable to make much headway, weighed down by worries about the health of the U.S. economy following a batch of dour data.
Markets also wait for possible action by ratings agency Standard & Poor's, which has yet to give its opinion of the debt deal hammered out in Washington that many predict will include a cut in its top rating for the world's biggest economy.
Japan has been priming the markets for currency intervention since the yen tested its record high, signaling it may try to tame the currency with a combination of yen-selling and monetary easing.
Noda has made plain that the yen was too strong for Tokyo's taste and has said he was in discussions with the Bank of Japan and international partners about the yen's strength.
Japanese officials fear that the currency's near 5 percent surge in the past month will harm the economy, which skid into its second recession in three years following the March earthquake and tsunami.
The Bank of Japan will probably ease its monetary policy if the finance ministry decided to intervene and sell yen, sources familiar with the central bank's thinking have told Reuters. The central bank is due to review its policy on August 4-5.
As renewed concerns about a slowing global economy rattled financial markets, Japan's Nikkei stock average fell for a second day on Wednesday, providing an additional headache to Japanese policy makers.
Japan last intervened in concert with the Group of Seven in March when expectations of fund repatriation after the earthquake pushed the yen to a record high.
This time, most market players believe Japan would have to go it alone since the yen's gains are more about dollar weakness than anything else. Tokyo last acted solo in September 2010, when it sold 2.1 trillion yen.
(Writing by Rie Ishiguro; Editing by Tomasz Janowski and Ramya Venugopal)