Japan's finance minister acknowledged currency intervention is an option for the first time since the yen's 14 per cent rise since May, and a candidate to become prime minister sanctioned solo intervention as the yen jumped to a 15-year high versus the dollar.
Finance Minister Yoshihiko Noda sharpened his rhetoric on foreign exchange on Wednesday as a rise in the yen underlined concerns that the currency's strength could hurt exports, heighten deflationary pressures and therefore derail a fragile economic recovery.
Political powerbroker Ichiro Ozawa, who is challenging Prime Minister Naoto Kan in a close-fought ruling party leadership race, later said Japan should take all possible steps to counter the rising currency including market intervention, even if solo action is ineffective.
Investors initially ignored Mr. Noda's comments and pushed the yen to a 15-year high of ¥83.34 per dollar, doubting that Japan would risk going solo and all but ruling out co-ordinated intervention with other Group of Seven countries.
The yen later gave back some of its gains.
A report showing Japanese machinery orders rose by the most in seven months in July did little to ease concern that a surging yen could undermine the country's important export sector, seen as critical to the recovery from the global economic crisis.
The Bank of Japan has indicated it is willing to ease monetary policy to help the economy, but is likely to bide its time until the ruling party settles a routine leadership contest with a vote on Sept. 14.
As the yen surged, the Nikkei average fell 2.2 per cent to its lowest close in a week on worries about the potential hit to export earnings.
Japanese officials have been trying to talk down the yen but so far their comments have had little effect as it keeps rising due to concerns about a slowdown in the global economy and the health of the European banking system.
"Basically, it is important to closely communicate with the international community, and we are currently making efforts on this," Mr. Noda told lawmakers in parliament.
"In the end, we will take decisive measures including intervention when needed."
The remarks indicated a shift in Mr. Noda's language. Previously he has repeatedly declined to comment on intervention when asked about it by the media.
The government will make necessary preparations for intervention, which should be conducted in the most effective way possible, parliamentary secretary of finance Hiroshi Ogushi said.
Meanwhile Mr. Ozawa told reporters Japan should intervene and sell the yen even if solo action was likely to be ineffective. He had said last week Japan should be prepared to act on currencies.
"They are trying to talk as much as they can, but we think actual intervention is unlikely because other G7 countries wouldn't co-operate," said Thomas Harr, head of Asian foreign exchange strategy at Standard Chartered in Singapore.
"The most likely outcome is more easing from the BOJ, which may be some measures to lower short-term interest rates."
Kan has vowed to take firm measures against currencies when needed in a plan to boost jobs and the economy.
Japan has not intervened in the currency market since March, 2004, after spending ¥35-trillion ($420-billion U.S.) over a 15-month period to support an economic recovery.
Japan's core private-sector machinery orders, a highly volatile data series seen as a leading indicator of capital spending, rose 8.8 per cent in July, a Cabinet Office report showed.
That was the biggest gain since a 15.4 percent rise in December and above the median market forecast for a 1.8 per cent increase.
But economists say strong gains in corporate spending are unlikely to last because of the damage a rising yen can do to corporate sentiment.
"Given the yen's rise and a slowdown in overseas economies, corporate investment will likely remain sluggish even if it picks up from low levels," said Junko Nishioka, chief economist for Japan at RBS Securities in Tokyo.
"As markets focus on the yen's strength, the government should take steps to help financing of small firms. The BOJ, meanwhile, should strengthen its monetary easing stance even if it risks being criticized for bowing to government pressure."
Mr. Ozawa said there was limited room for the BOJ to tackle the rising yen via policy steps even as he urged aggressive action on other fronts, including considering further debt issuance if necessary to fund steps to bolster a faltering economy.
The BOJ stood pat on monetary policy on Tuesday but vowed timely action when needed, setting the stage for possible easing next month.
By then, the leader of the ruling Democratic Party will be known and the central bank will have a clearer idea about what damage the yen is doing to Japan's exports.
BOJ Governor Masaaki Shirakawa reiterated on Wednesday his reluctance to return to quantitative easing to support the flagging recovery but indicated he was weighing the options.