Analysis: Japan to mix bold moves with skirmishes to rein in yen

Tue Nov 1, 2011 6:36am EDT
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By Leika Kihara

TOKYO (Reuters) - Japan's costly attempt to weaken the yen underscores its determination to do its best to ease the pain felt by the export-reliant economy without embarking on a potentially thorny sustained yen-selling spree to turn the market's tide.

Vice Finance Minister Fumihiko Igarashi said Tokyo was not done intervening yet, signaling its readiness to step in again, after the authorities sold about 7.7 trillion yen ($99 billion), about double the previous record set on August 4.

Finance Minister Jun Azumi has also said dollar/yen levels around 76 and 77 were "inappropriate," a sign authorities want the dollar to stay above 78 for as long as possible.

But Tokyo knows spending heavily day after day to defend a "line in the sand" would be unrealistic and would draw fire from its Group of Seven counterparts, concerned it could compromise the push for more flexible emerging markets rates.

Investors trading dollar/yen are more diverse now than when Japan last repeatedly sold its currency nearly a decade ago. The yen is also rising on factors beyond Tokyo's control, such as worries over Europe's debt woes, making it hard for authorities to influence the exchange rate in a sustained way.

The government, instead, will vary the size and timing to maximize the effect of any future intervention -- either in the form of another "big bang" or several rounds of action spending far smaller amounts, in the event of another yen rally.

The record size of intervention may have a symbolic meaning but what matters more is to step in at the best timing to catch speculators off guard, sources familiar with Japan's currency policy have said.

"Sticky yen rises will continue as a trend," one of the sources said. "There are many ways to make intervention work."   Continued...

<p>A foreign exchange broker rests his thumb on his lips as he is pictured near Japanese and American flags at a trading room in Tokyo October 26, 2011. REUTERS/Yuriko Nakao</p>