Japan sold the yen for the second time in less than three months after it hit another record high against the dollar Monday, saying it intervened to counter speculative moves that were hurting the economy.
Finance Minister Jun Azumi said Tokyo stepped into the market on its own at 10:25 a.m. local time (9:25 p.m. EDT) and would continue to intervene until it was satisfied with the results.
Tokyo's latest foray into currency markets followed weeks of warnings that its patience with the yen's strength was wearing thin, and came just days before the Group of 20 leaders' summit in Cannes, France.
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 Tokyo is keen to win G20 understanding that a strong yen is one challenge too many for an economy grappling with a nuclear crisis, a $250 billion rebuilding effort from a March earthquake and tsunami and ballooning public debt.
Japan also argues that the yen is sought by investors worried by the euro zone debt crisis and stuttering U.S. growth and the demand has nothing to do with the fragile health of the Japanese economy.
The dollar vaulted more than 4 percent past 79 yen, from around 75.65 yen, after Tokyo began selling its currency. The dollar had touched a record low of 75.31 yen earlier on Monday.
I have repeatedly said that we would take decisive steps against speculative moves in the market, Azumi told a news conference. Unfortunately it (the market) has not reflected our economic fundamentals at all.
Azumi said that while Monday's intervention was a solo act he was in a continuous contact with his international counterparts.
I have been frequently in contact (with other countries) ... I have always conveyed Japan's stance and interests at senior official levels, he said.
Several G20 nations, including South Korea and Indonesia, have been intervening regularly in currency markets, but Japan is under more scrutiny as an issuer of one of three global currencies and does not want to be deemed a currency manipulator.
Following a G20 finance leaders' meeting earlier this month Azumi said the group's statement highlighting adverse effects of excessive currency swings reflected Japan's concerns.
He would not comment on the size of the intervention, but one trader said the authorities were intervening quite persistently.
My sense is that they might not quit very easily, a trader said.
The dollar remained nailed near 79.20 yen for more than an hour after the intervention due to a large bid at that level, prompting traders to speculate that Japan might want to set a Swiss-style floor for the dollar/yen.
However, Japanese officials said at the time of the Swiss Central Bank intervention in September to set a floor for the euro that the Japanese economy was too big for such a tactic, and dealers said Tokyo was unlikely to peg the yen to any particular level in the longer run.
If the dollar held around 79.20 -- its highest since Aug. 5 -- it would be its biggest one-day percentage gain since October 2008, bigger than that following Tokyo's joint intervention with Group of Seven nations in the aftermath of the March 11 disaster.
This week's action follows a record 4.5 trillion yen ($59 billion) single-day selling intervention on August 4, which the Bank of Japan followed up with monetary policy easing.
Even though the yen's exchange rate when measured against a trade-weighted basket of currencies and adjusted for inflation is not far from its 30-year average, its rate against the dollar is much stronger than those assumed by Japanese exporters in their earnings projections.
That has led to a flurry of warnings from leading companies that they might have no choice but to move more production abroad to cope.
Chipmaker Elpida warned it might have to move production abroad and Honda's chief executive said earlier this month that the company would half exports from Japan over the next decade because of the strong yen.
Last Thursday, acting in part out of concern that such hollowing out of the industry could derail Japan's recovery, the Bank of Japan eased its monetary policy by boosting government bond purchases.
Japan's economy has been recovering from the March 11 disaster that pushed it into its second recession in three years, with companies swiftly restoring production and supply chains.
Policymakers have counted on reconstruction spending and robust demand from emerging markets to sustain the momentum, but the yen's pressure on exporters' earnings and slowing global growth spurred them to act.
Yunosuke Ikeda, senior FX strategist at Nomura Securities, said last week's central bank easing and Monday's intervention could be an effective combination.
It was very good timing. The BOJ has prepared the ground by easing last week. Speculators' yen-buying position has piled up, and intervention is most effective in such cases, Ikeda said.
Strategists were split, however, on how long the effect of the intervention would last. While Ikeda thought Monday's action could keep the yen away from its peaks for quite some time, others were more skeptical.
The effect of intervention is likely to be temporary but the authorities probably had to make a show of strength, said Takafumi Yamawaki, chief fixed income strategist at JPMorgan Securities in Tokyo.
The dollar/yen exchange rate is politically significant so they had to make an impact on the pair in one form or another, although intervening won't have much effect on the real economy.
Since September 2010, Japan has now intervened three times on its own and once jointly with other G7 rich nations to weaken the yen. But the effects of past intervention have proved fleeting in the face of steady demand from nervous investors seeking highly liquid and relatively safe assets such as Japanese government bonds.
($1 = 75.760 Japanese Yen)
(Additional reporting by Kaori Kaneko and Hideyuki Sano; Writing by Tomasz Janowski; Editing by Neil Fullick and Alex Richardson)