Japanese policymakers voiced growing alarm on Tuesday as the yen scaled highs seen before last week's intervention and global stock markets crumbled under mounting fears of a new financial crisis.
Finance Minister Yoshihiko Noda on several occasions repeated the mantra that he was watching markets closely as the dollar slid below 77 yen, under levels that spurred Tokyo to take action on August 4.
He indicated that authorities would wait to see market reaction to U.S. Federal Reserve decisions later in the day (2:15 p.m. EDT) before deciding whether to act again.
Bank of Japan Governor Masaaki Shirakawa showed similar levels of concern, telling parliament he needed to be particularly mindful of the risks that a strong yen poses to the Japanese economy.
Several measures are available, depending on the outcome of the FOMC meeting, and since this could have a big impact on Japan we need to respond flexibly, Noda said when asked about the chance that the yen could rise after the Fed meeting. I want to coordinate with the BOJ and respond as appropriate.
While the yen climbed, global stock markets went into a nosedive as the U.S. government's loss of its top credit rating and a piecemeal response to Europe's sovereign debt woes frayed investor nerves.
With U.S. stocks poised for further steep losses, markets are pinning their hopes on some form of action by the Federal Open Market Committee, even though most analysts expect the Fed to refrain from big policy steps.
The Japanese currency was trading at around 77.05 against the dollar, close to a four-month high of 76.29 yen hit before Tokyo sold a record of about 4.5 trillion yen last week.
The Japanese authorities are concerned that yen's untamed rise could derail the economy's recovery from the damage wrought in March by the triple-blow of a massive earthquake and tsunami and a radiation crisis at a crippled nuclear plant.
The central bank also stepped in, loosening monetary policy by boosting its asset buying scheme by half to 15 trillion yen ($193 billion) in a move aimed both at making the intervention more effective and shoring up market confidence.
The effects of 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 the Swiss franc.
Additional solo intervention could also meet with limited success as Japan is unlikely to get the necessary cooperation from the Group of 20 and Group of Seven countries.
For Japan, there aren't really any policy alternatives left to stop yen strength, said Junya Tanase, chief foreign exchange strategist at JPMorgan Bank in Tokyo.
It is difficult for G20 to coordinate on policy because the group is so big. The G7 can coordinate to provide liquidity, but their basic stance is one that is critical of intervention.
The Group of Seven finance ministers and central bankers tried to calm markets with their pledge over the weekend to act if needed, while the European Central Bank bought Italian and Spanish debt in the market to sling a safety net under the euro zone's third- and fourth-largest economies.
Neither managed to prevent a sharp sell-off, but Japanese government sources told Reuters the feeling among G7 nations was that without those actions markets could have turned much uglier.
BOJ Governor Shirakawa told parliament he still expected Japan's economy to return to moderate growth, but highlighted growing discomfort with a strong yen and increased overseas risks to the economy.
It's happening against the backdrop of weakness in the global economic recovery, and uncertainty over U.S. and European fiscal problems, Shirakawa said, referring to the rising yen.
These factors, coupled with the short-term downside effect from yen rises, hurt (Japan's business) sentiment.
Despite Japan's own troubles with public debt twice the size of the $5 trillion economy, the post-quake recession and a political stalemate, its deep bond market is seen as one of the relatively few safe investments both by Japanese and foreign investors.
(This story is corrected in the third paragraph to show the U.S. Federal Reserve decisions are expected at 2:15 p.m. EDT.)
($1 = 77.670 Japanese Yen)
(Additional Reporting by Leika Kihara; Writing by Tomasz Janowski; Editing by Joseph Radford)