Japan stepped up its warnings on Thursday against the yen's rise to a 13-year high versus the U.S. dollar, saying it would deal appropriately with the situation which may include intervening in the foreign exchange markets.
The dollar sank near 87 yen on Wednesday in the wake of the Federal Reserve's hefty interest rate cut, which added to pressure on the Bank of Japan to cut rates on Friday to support an export-reliant economy already in recession.
"We have conducted currency intervention in the past, and we'll take appropriate measures, which includes that (option)," Chief Cabinet Secretary Takeo Kawamura told a news conference.
"As U.S. interest rates approach zero, the dollar's weakness is continuing, and it's solely the dollar that is weakening ... We must closely watch it given its impact on the real economy," he added.
Tokyo has stayed out of the market since a yen-selling spree totaling 35 trillion yen in 2003 and the first quarter of 2004, when the government waged a campaign to prevent a rapid rise in the currency from derailing a then-fragile economic recovery.
Vice Finance Minister for International Affairs Naoyuki Shinohara also voiced a slightly tougher line than usual on Thursday, telling reporters that the ministry would take proper steps as needed in the currency markets.
The ministry's standard line has been that it is watching the currency markets carefully.
But Finance Minister Shoichi Nakagawa declined to comment on whether Tokyo would move in to the currency market.
"I won't answer on whether we will intervene or not. It's my responsibility to take the necessary steps under my jurisdiction, not just on currency policy," he told reporters on Thursday. "Market rates will be set by markets in principle," he said, adding that he was aware the strong yen was hurting exporters' earnings.
Reflecting the gloomy outlook, the government is expected to cut its assessment of the economy in December for the third month running to warn of a worsening business climate, the Nikkei newspaper reported.
Japan, like the United States, is already in recession. Major companies such as carmakers Toyota and Honda are slashing output as customers around the world close their wallets.
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The dollar traded around 87.70 yen on Thursday, near Wednesday's 13-year low of 87.13 yen. It hit a 2-1/2-month low against the euro as the U.S. rate cut widened the interest rate differential in favor of the euro zone currency.
The Fed's dramatic rate cut has raised the pressure on a reluctant Bank of Japanto follow suit at its two-day policy review ending on Friday. U.S. interest rates are now below Japanese rates.
Economists say if the BOJ keeps monetary policy steady it would rock Japanese markets and worsen the crisis.
Two-thirds of economists expect the BOJ to cut rates to 0.10 percent from the current policy target of 0.30 percent, a Reuters poll showed, although central bank officials have been cautious about cutting Japan's already low rates.
Japanese government officials have called on the BOJ to take more action to help the economy and ease corporate funding strains, and the finance minister kept up the pressure.
"If the BOJ shares the government's view on the financial situation, I expect the bank to take whatever steps are necessary," Nakagawa said on Thursday.