Japanese policymakers voiced growing alarm on Tuesday over upheavals in financial markets and a worsening global economic outlook as stocks plunged and the yen edged back to highs scaled prior to last week's intervention.
Finance Minister Yoshihiko Noda said he would watch markets with a sense of urgency after stocks tumbled on recession fears, while Bank of Japan Governor Masaaki Shirakawa said the uncertain outlook for the world economy posed a major risk for Japan.
Tokyo's Nikkei share average <.N225> plunged more than 4 percent, falling below 9,000 for the first time since mid-March, after Wall Street lost more than 6 percent in a flight-to-safety sell-off following the U.S. government's loss of its top credit rating.
I will pay close attention to market movements with a sense of urgency today, Noda told reporters when asked about the stock market falls and a persistently strong yen despite Japan's solo intervention last week to stem its rise.
The Japanese currency was trading at around 77.35 yen against the dollar, close to a four-month high of 76.29 yen hit last week before Tokyo intervened and way off post-intervention levels of more than 80 yen to the dollar.
Japan sold a record of more than 4 trillion yen last Thursday to prevent the yen's climb from derailing the economy's recovery from the damage wrought by the triple-blow of a massive earthquake and tsunami and a radiation crisis at a damaged nuclear power plant.
The central bank also stepped in, loosening monetary policy by boosting its asset buying scheme by half to 15 trillion yen in a move aimed both at making the intervention more effective and shoring up market confidence.
But the effects of the joint effort, Japan's third foray into currency markets in less than a year, have worn off quickly as fears that twin debt crises in the United States and Europe could tip the world economy back into recession drove investors into low-risk assets such as the yen, gold and Swiss franc.
Shirakawa told parliament he still expected the world's third largest economy to return to moderate growth, but highlighted increased overseas risks to such a scenario.
Minutes of the central bank's meeting in July showed that its board was increasingly worried about the global economic outlook and two of its members were already advocating further monetary easing.
Despite Japan's own troubles with public debt twice the size of the $5 trillion economy, post-quake recession and political stalemate, its deep bond market is seen as one of the relatively few safe investments both by Japanese and foreign investors.
Global stock markets plunged on Monday as the G7 finance ministers' and central bankers pledge over the weekend to help smooth markets if needed provided little reassurance.
The European Central Bank swept into the bond market to buy up Italian and Spanish debt and sling a safety net under the euro zone's third- and fourth-largest economies. But bickering persisted in Europe over a longer-term rescue plan.
Noda said Monday's G7 statement helped to ease market uneasiness and he would keep in close contact with his G7 partners in the coming weeks.
The finance minister declined to comment on whether he will run in the ruling party leadership race, saying he will fulfill his duty as a member of Prime Minister Naoto Kan's cabinet given the current circumstances.
(Writing by Tomasz Janowski)