Japanese Finance Minister Yoshihiko Noda kept up his warning to markets against pushing up the yen too much, saying that he was aware of demands from the business sector for authorities to act against yen rises that hurt the export-reliant economy.
While Noda stopped short of issuing a stronger warning that Tokyo was ready to act decisively when needed, authorities are gearing up for possible intervention as the yen heads toward the record high of 76.25 hit days after the March 11 earthquake.
The dollar fell to a record low against the safe-haven Swiss franc and a four-month low against the yen below 78 as President Barack Obama warned a deadlock in U.S. talks on the debt ceiling and a resulting default on bond obligations would be a "reckless and irresponsible outcome."
It briefly spiked in late morning to 78.75, but quickly slid back to 78.25 yen and traders said there were no signs of official intervention.
Japanese policymakers and business leaders have become more vocal of the potential harm a strong yen could have on exports with the head of Keidanren, Japan's biggest business lobby, on Monday calling for joint Group of Seven intervention to stem yen gains.
"I am aware there are various opinions," Noda told reporters after a cabinet meeting on Tuesday.
"Movements have been one-sided due to external factors, but I'll closely watch market moves."
The G7 jointly intervened when the yen spiked to a record high in the aftermath of the March quake, on speculation that Japanese firms would repatriate some of their massive foreign assets to pay for reconstruction.
Japanese authorities do not rule out the possibility of solo intervention with a senior finance ministry official saying earlier this month that the government could step in without warning to weaken its currency.
Intervention may now be becoming more probable, with the dollar now more than 4 yen below the rate on which big manufacturers use in their earnings forecast for the current fiscal year.
"Japanese authorities could intervene solo if dollar accelerates its fall and heads toward the all-time low hit against the yen in March. Any such move would be to slow the fall and prompt investors to readjust positions," said Satoru Ogasawara, economist at Credit Suisse.
Economics Minister Kaoru Yosano, who usually says currency levels should be set by markets, also voiced concern over the damage excessive yen rises could inflict on manufacturers.
"Because Japanese manufacturers depend heavily on external demand, an excessive rise in the yen would undermine their business plans," Yosano said.
Japanese media also quoted trade minister Banri Kaieda as saying that the Ministry of Finance and the Bank of Japan should make an appropriate decision on whether to step into the currency market.
BOJ ALSO UNDER PRESSURE
Growing market worries about the possibility of a U.S. debt default, coupled with Europe's debt problems, have pushed up the yen as investors seek the relative safety of Japan's currency.
That clouds the outlook for Japan's economy, which is just overcoming supply constraints from the devastating earthquake in March and needs support from exports to recover from the post-disaster recession.
Despite repeated verbal warnings by policymakers, market expectations of intervention have not heightened much because the moves are being driven by factors beyond Japan's control.
But with little prospects of a sharp reversal in the weak dollar trend, that may start to change, although some traders say stocks would have to tank in tandem for Tokyo to step in.
"I think there's a risk of intervention, but not at this level. The yen would have to fall further towards 76 yen and stocks would have to edge lower for the authorities to intervene," said a trader for a Japanese brokerage who did not want to be identified by name.
The yen's climb also puts pressure on the central bank to ease monetary policy further in the hope of pushing down bond yields and stemming yen rises.
BOJ Governor Masaaki Shirakawa warned on Monday that the yen's strength could hurt Japan's economic outlook and that the central bank will consider what it can do to support the economy short-term.
Central bank officials say that a yen spike combined with tumbling share prices would be the most likely next trigger for further easing.
If the finance ministry decides to intervene, the BOJ may come under pressure to ease policy to amplify the effect.
Monetary easing may be discussed at the BOJ's next rate review on Aug. 4-5, or even earlier if the yen continues to spike.
Japan last intervened on its own in September 2010, its first market foray in six years. The BOJ eased monetary policy both in combination with the solo and coordinated interventions.
(Additional reporting by Rie Ishiguro; Editing by Tomasz Janowski)