Finance Minister Taro Aso said on Tuesday that Japan could act against the yen's rise as needed, based on a G20 agreement backing currency stability, if "one-sided" and "speculative" moves were observed in the currency market.
Aso told reporters that finance leaders from the Group of 20 major economies agreed in Shanghai in February that excessive volatility and disorderly moves in the exchange rates hurt financial stability, and he expected the G20 to discuss the issue again when they meet this week in Washington.
Aso has the power as finance minister to instruct the Bank of Japan to intervene in the currency market. It cannot do so on its own authority.
The dollar was hovering near 108 yen, not far off a 17-month low of 107.63 yen hit this week on bets that the U.S. Federal Reserve would go slow in future interest rate hikes.
"We would take necessary steps under certain circumstances if one-sided and speculative moves were observed. I believe we can respond in line with the G20 agreement."
The finance minister's comments echo remarks by Chief Cabinet Secretary Yoshihide Suga, the government's top spokesman, that the G20 agreement would not prevent Japan from acting in the market.
Despite verbal warnings from Japanese policymakers, the yen has rallied against the dollar, with investors expecting Tokyo to refrain from intervention at least until after this week's G20 meeting in Washington.
The yen's rapid gains threaten to hurt Japan's export sector and its prospects for defeating two decades of deflation and stagnation.
Aso said G20 finance chiefs will also discuss the issue of tax evasion at their meeting in Washington, following the "Panama Papers" leaks - revelations about the clients of a Panamanian law firm specialized in setting up shell companies.
Some 96 jurisdictions have committed to automatically exchange tax information with other governments in the next two years. Panama is now the only major financial center among the countries that have not committed to the automatic sharing of tax information with other governments, according to an OECD report last month to G20 finance ministers.
"The OECD's response will probably be to ask Panama whether it would provide information or be isolated," Aso said.
"There will be a lot of discussion about prevention of tax avoidance and tax evasion at this week's G20 meeting in Washington. Japan has led (such debate) from the beginning, so we must tackle this issue."