A broad fall in the dollar has propelled the yen higher, bringing the Japanese currency within range of levels it has not traded at for 15 years and raising speculation whether even more gains will tempt Japanese authorities to intervene.
The dollar hit an eight-month low of 85.95 yen last week, having shed about 6 percent since mid-June as weak economic data sparked worries about the sustainability of a U.S. recovery.
A further drop in the dollar below a trough set last November at 84.82 yen would take the Japanese currency to a 15-year peak and bring it ever closer to its 1995 record high of 79.75 per dollar.
The yen stood near 86.70 yen to the dollar JPY= on Monday, off last week's high but still stuck at levels that could hurt Japanese exporters.
WHAT WOULD HEIGHTEN INTERVENTION JITTERS?
Currency dealers won't seriously expect intervention until the dollar drops below November's low of 84.82 yen.
The yen's rise would have to speed up and a fall in Japanese shares would have to deepen for authorities to get really concerned, market players say.
But the yen has hardly been volatile. Its one-month historical volatility is around 12 percent, below the past five years' average of 13.7 percent and way below a peak above 30 percent in late 2008.
Thus Japan may have a hard time convincing other G7 partners about the need to intervene just when they are calling on China to make its yuan more flexible to ease global imbalances.
Any attempt to cheapen the yen could run counter to U.S. President Barack Obama's plan to double U.S. exports, raising diplomatic obstacles to intervention by Tokyo.
To be sure, the yen's rise has helped make Japan's benchmark Nikkei share average .N225 one of the worst performers in the region in the past month. But the average has managed to stay above a trough hit in November when the yen last surged.
Seasoned FX traders also say the market is not gripped with the nervous tension which accompanies intervention expectations.
For instance, option markets are not pricing in a jump in yen volatility -- an unusual development when the yen is so close to historic peaks. One-month implied volatility JPY1MO= is about 11 percent, near a 2-1/2-month low of about 10 percent last week.
HAS JAPAN ABANDONED ITS OLD INTERVENTIONIST WAYS?
Japan's authorities haven't intervened since March 2004, when a 15-month long yen selling spree came to an end.
During that period, they sold 35 trillion yen ($400 billion), the equivalent of more than a third of the annual budget, to try to stop a rising yen from harming all-important exports and to fight deflation.
Even a rare G7 statement between meetings in October 2008, which singled out yen volatility and was seen as giving Japan approval to intervene, did not tempt Tokyo.
Many analysts think intervention would be a drop in the ocean when the yen is rising against a broadly weakening dollar. In fact, the score card for the 2003-2004 intervention was mixed at best as the yen continued to gain gradually during the campaign.
Fear of losses could also make Tokyo reluctant after the Swiss central bank, which intervened heavily to curb strength in the Swiss franc, faced criticism at home when it suffered losses of over 14 billion francs ($13.5 billion) from its franc selling.
In March, Japan's then-Finance Minister, Naoto Kan, said in parliament its foreign currency account already had net paper loss of around 5 trillion yen.
SO IS INTERVENTION OUT OF THE QUESTION?
To rein in the yen's rise, the authorities did check market rates with commercial banks last November for possible dollar buying, though they stopped short of making orders, a tactic known as rate-checking. They are seen as likely to employ this again should the yen rise further.
But many market players expect Tokyo's efforts to thwart yen gains are likely to focus more on monetary policy.
Under government pressure, the BOJ also called an emergency meeting in early December and decided to pump 10 trillion yen in three-month funds into the banking system, a move many market sources said was aimed at the yen more than anything.
Some market players speculate the BOJ could offer cheap funds to banks for six months, rather than the current three months, if the yen threatens to rise further.
Osamu Takashima, chief FX strategist for Citibank Japan, says intervention has tended to happen when the yen's real effective exchange rate has risen around or above two standard deviations above its five-year moving average.
The yen's effective rate would hit that level if the dollar falls below 85 yen and stays there consistently.
Outright intervention is possible if the dollar breaks below its November trough and nears the 1995 record low, said Tomoko Fujii, FX strategist at Bank of America Merrill Lynch in Tokyo.
WHAT HAVE OFFICIALS SAID?
So far their comments have been pretty low-key.
The Ministry of Finance is in charge of Japan's currency policy and the BOJ conducts any intervention on its behalf.
Finance Minister Yoshihiko Noda said on Monday: Excessive foreign exchange moves are undesirable because of the impact they have on the economy and financial markets. From that standpoint, we are watching currency moves closely.
His deputy, Motohisa Ikeda, is known to have favoured a weaker yen but since he took the post in June, he has avoided strong comments, saying in general he is worried about the impact of the yen's rise on the export industry.
Bank of Japan Governor Masaaki Shirakawa has said the yen's rise and stock price falls may affect the economy, but has stuck to the view the economy is on a recovery trend. [ID:nTFD006502] ($1=1.041 Swiss Franc) ($1=86.45 Yen) (Editing by Charlotte Cooper)