Japan intervenes for 1st time in 6 years to cap yen

Japan stepped into the currency market on Wednesday for the first time in six years, selling yen to stem a rise that is threatening a fragile economic recovery.

The dollar extended its gains after intermittent yen selling and was up 2% on the day and nearly two yen above a 15-year low.

But it was unclear whether prime minister Naoto Kan's government had the stomach for a prolonged campaign similar to Japan's last foray into foreign exchange markets in 2003-2004.

Finance minister Yoshihiko Noda confirmed the intervention, saying Tokyo was also communicating with authorities overseas but indicating that Japan acted alone.

US officials at the Federal Reserve and the Treasury declined to comment immediately about Tokyo's action.

Noda would not say whether the authorities were buying dollars in the first intervention since March 2004, but two traders said the Bank of Japan appeared to have bought dollars around 83 yen at the start of the action.

The Bank of Japan acts on behalf of the ministry of finance in currency intervention.

"We will take decisive steps if necessary, including intervention, while continuing to closely watch currency market moves from now on," Noda told reporters at a hastily arranged news conference.

The dollar had hit a 15-year-low at 82.87 yen earlier in the day but was at 84.78 yen by noon.

Prime minister Naoto Kan's government has been trying to talk down the yen but until Wednesday had stopped short of intervening in the markets, apparently worried that acting without Group of Seven partners would not be very effective.

Kan was re-elected ruling party leader on Tuesday, decisively fending off a challenge from powerbroker Ichiro Ozawa, an outspoken advocate of intervention.

"There were views in the market that Kan was more tolerant of a higher yen and the yen rose after he won the ruling party leadership vote yesterday," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

"The government probably wanted to stamp out those views. But the question is: Will the yen stop rising from here? It's not clear."

Last time Japan intervened in the foreign exchange market, it embarked on a 15-month, 35 trillion yen ($421.7 billion) ($421.7 billion) selling spree aimed at preventing a strong yen from snuffing out an economic recovery.

Analysts said it was unlikely that other countries would help Japan tamp down the yen since they also need weaker currencies to boost exports and help their own fragile economic recoveries.

Some doubted that Japan would be as aggressive as earlier in the decade.

"The amount of intervention isn't likely to be as much as Japan was spending the last time it intervened, so it won't be enough to stop dollar/yen from falling. It is also unlikely that other countries will cooperate," said Junya Tanase, currency strategist at JP Morgan in Tokyo.

The yen had surged to its highest against the dollar since 1995, as low US interest rates have made the dollar cheap to borrow and sell for higher-yielding assets and as talk has resurfaced that the Fed might consider buying more assets to support the economy.

The Japanese currency's rise has brought it closer and closer to its record peak of 79.75 per dollar set in 1995 and has weighed on the Tokyo stock market's Nikkei average, which climbed 1.8% on the day as news of the intervention spread.

The euro rose 1.8% to 109.85 yen.

Japan is not the only developed economy to have intervened to weaken its currency in the past year.

The Swiss National Bank intervened to hold the Swiss franc down against the euro, in a move launched in March 2009 as part of a package of steps to fight deflation risks.