Japan is not ruling out market intervention to curb the yen's rise, government sources said on Wednesday, sending the strongest signal yet that the currency's march towards all-time highs may spur Tokyo into action.
Japanese officials have repeatedly tried to talk the yen down recently amid concern that it could cripple an export-driven recovery, but markets have doubted they would risk going solo and all but ruled out a co-ordinated intervention with other Group of Seven countries.
Government sources said intervention was possible and one said acting alone was always an option, echoing an earlier report in the Nikkei newspaper.
Still, investors remained skeptical whether intervention, unless coupled with bold monetary policy easing, would do much to stem a rise that took the yen to a 15-year high against the dollar and a nine-year peak against the euro on Tuesday, battering the Tokyo stock market
"Even if we see a short-term bounce in dollar/yen, I still think the risk is that we head lower before all is said and done," said Robert Rennie, chief currency strategist at Westpac Bank in Sydney.
Finance Minister Yoshihiko Noda told reporters he would respond appropriately as needed, an expression he has not used before in his efforts to curb a rally that threatens to make Japanese goods less competitive and erode exporters' profits, the lone bright spot in the country's fragile economy.
The sharp yen rise and resulting declines in Tokyo stocks have made it more likely that the Bank of Japan will further ease monetary policy before its scheduled rate review on Sept. 6-7, sources told Reuters.
The Nikkei average fell 1.7 per cent on Wednesday to a 16-month low.
Bank of Japan Governor Masaaki Shirakawa will leave on Thursday to attend the Kansas City Federal Reserve's conference in Jackson Hole in the United States and return on Aug. 30.
His trip may make it less likely, but not impossible, that the BOJ would hold an emergency meeting while he's away.
Speculators anyway doubt the Bank of Japan is ready for drastic steps, and say any more modest measures would likely have little lasting impact in braking the yen or spurring economic growth.
"If they really want to do something on the yen ... they have to create inflation expectations," said Martin Schulz, a senior economist at Fujitsu Research Institute.
"But I don't think the BOJ would go in that direction."
The yen has risen nearly 10 per cent against the dollar so far this year, with the U.S. currency weighed down by doubts about the U.S. recovery and falling Treasury yields, along with other global factors that Tokyo has little power to influence.
Japan has not intervened in the currency market since March, 2004, when it ended a 15-month ¥35-trillion ($415.9-billion U.S.) selling spree aimed at rescuing an economic recovery.
The Nikkei newspaper said Japan's finance ministry would consider intervening unilaterally if the yen rose by several yen to the dollar in a single day.
The dollar sank as low as 83.58 yen at one point on Tuesday but rose to 84.32 yen on Wednesday, helped by the Nikkei report. The euro fell as much as 2.2 per cent to 105.44 yen on Tuesday. It was around 106.62 yen on Wednesday.
Annual growth in Japan's exports slowed less than expected in July, finance ministry data showed on Wednesday, but economists expect export growth to slow in the coming months due to signs the global economic recovery is faltering.
Nissan Motor Co. said the yen rally would have a serious impact on its annual results. Japan's No. 3 auto maker is assuming a 90 yen per dollar rate for the year to March, and estimates every one yen gain cuts its operating profit by ¥15-billion.
Tokyo also would probably have difficulty convincing its U.S. and European counterparts to jointly step into the markets, given that a weakening of their currencies is helping their exports.
Markets have speculated for weeks that rather than intervening on its own, Japan would opt for monetary easing. The most likely scenario is for the BOJ to increase the size or extend the duration of a short-term fund supply scheme put in place in December, sources familiar with the matter say.
Japanese companies have become more resilient to yen strength and enjoyed a sharp jump in profits for the April-June quarter, but every 1 yen rise against the dollar will trim recurring profit at major manufacturers by 0.9 per cent this fiscal year, according to an estimate by Nomura Securities.