Japanese Prime Minister Shinzo Abe said on Monday he has instructed Finance Minister Taro Aso to watch currency markets "ever more closely" and take steps if necessary, in the wake of Britain's historic vote to leave the European Union.
Abe's comments at an emergency meeting between the government and the Bank of Japan come as some analysts raised the possibility of the BOJ holding an unscheduled policy review ahead of the regular meeting later in July to offer additional stimulus.
"Risks and uncertainty remain in financial markets," Abe said.
"We need to continue to work toward market stability," he said, signaling Tokyo's readiness to conduct yen-selling intervention in the market if it deems yen rises as excessive.
Abe summoned Aso and Bank of Japan Deputy Governor Hiroshi Nakaso to discuss how to deal with the market turbulence caused by Brexit.
The yen briefly soared above the key threshold of 100 to the dollar on Friday as investors hoarded the safe-haven currency after the Brexit vote, adding to headaches for Japanese policymakers worried about the effect a strong yen could have on exports.
"I was instructed by the prime minister to take various, aggressive responses to ensure stability in financial and currency markets," Aso told reporters after the meeting.
Nakaso said the BOJ remained in close contact with other central banks to ensure global financial markets had ample liquidity.
The deputy governor, who was speaking to reporters after the meeting, declined to comment on whether the BOJ would hold an emergency rate review to expand monetary stimulus.
Some analysts say the central bank could hold an emergency meeting to expand stimulus further if the BOJ tankan business survey on July 1 confirms worsening of the domestic economy and prices.
"There's 30 percent chance of BOJ holding an extra policy meeting," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
"We have expected the BOJ to ease again in July. And Brexit further raised the possibility of BOJ action as it adds to risks to Japan's economic outlook," she said.
But analysts say it will be difficult for Tokyo to intervene in currency markets to stem the yen's strength given the risks of it being labeled a currency manipulator.
Japanese authorities argue that their action to stem excessive yen strength would be in line with G7/G7 agreements on currency stability. However, U.S. Treasury Secretary Jack Lew warned against currency intervention earlier this month, describing market moves as orderly at a time when Tokyo raised concerns about excess volatility in the exchange rates.
"Unlike Switzerland, Japan as the G7 chair finds it hard to intervene in currency markets as that would prompt other countries to label Tokyo a currency manipulator. Even if it intervened, it would not have a lasting impact on markets," Muguruma said.