Expectations Japan will intervene in currency markets grew Tuesday as the yen's rise to a near record high threatened to stall economic recovery in the aftermath of the March earthquake.
The dollar climbed back above the 77-yen levelTuesday, after falling as low as 76.29 yen Monday. It hit a record post-World War II low of 76.25 yen in the days following the March 11 earthquake and tsunami.
Officials intensified their rhetoric and analysts predicted action by the central bank and finance ministry as early as this week.
Meanwhile, the latest earnings reports from Japanese companies have revealed how the strong yen is eroding corporate profits and weighing on an economy trying to recover from disaster.
Japanese Finance Minister Yoshihiko Noda declined to comment on currency intervention but expressed sharpened concern about the yen's strength. He acknowledged that Japanese companies "will suffer" if the yen isn't tamed.
"The yen is strongly overvalued and continues to show one-sided moves," he told reporters Tuesday.
The yen's surge after the March disasters prompted the Group of Seven major industrialized nations to work together to weaken the Japanese currency. Officials feared that the fast rising yen would exacerbate the economic impact of the disaster.
The coordinated intervention in international currency markets marked the first by the G-7 countries since the fall of 2000, when the G-7 intervened to bolster the euro.
A strong yen is painful for Japan's export-driven economy because it reduces the value of foreign earnings for companies like Toyotaand Nintendo. It also makes their goods more expensive in overseas markets.
Honda said Monday that the exchange rate erased 22.5 billion yen ($288 million) from its operating profit in the latest quarter. At Mazda, the yen sapped 3.1 billion yen ($40 million) from its bottom line last quarter.
Any currency intervention will likely be coupled with monetary policy easing by the Bank of Japan, which meets for a two-day policy board meeting on Thursday, analysts said.
Masaaki Kanno, chief economist at JPMorgan Securities Japan, believes the central bank is "ready to ease," probably when it meets this week.
With interest rates at virtually zero, Japan's central bank must turn to other tools to loosen its already super-easy policy. One option would be to expand an asset purchasing program to buy more corporate and Japanese government bonds.
Such a decision, Kanno said, would represent a pre-emptive move by the central bank to "prevent the erosion" of the economic recovery. It would also signal Bank of Japan Gov. Masaaki Shirakawa's concerns about the fate of Japanese manufacturers in the face of increasing competition from Asian rivals, along with the yen's rally.
"It has become more difficult for Japanese exporters to compete with those Asian makers, if they raise prices in overseas markets," he said in a research note Tuesday.
Japan, the world's No. 3 economy, likely contracted in the April-June quarter but is projected to return to growth in the second half of the year. The yen's persistent strength, however, and an increasingly murky outlook for the global economy could dampen or reverse a recovery.
A report from UBS notes that despite increasingly urgent pleas from the business world, the Japanese government has taken its time to formulate a response.
"There remains a risk of the (finance ministry) leaving it far too late, because the longer the wait, the more punishing on the Japanese economy it would be," UBS said.