Euro-yen intervention an option for Japan, but not now

Thu Jan 19, 2012 4:43am EST
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By Leika Kihara

TOKYO (Reuters) - Japanese authorities, while reluctant to act now, may consider engaging in a rare intervention to stem yen rises against the euro if the moves appear to be driven by speculators and sharp enough to severely hurt business sentiment.

If they were to act, authorities will step directly into the euro-yen market despite its low trading volume and may twin it with dollar-yen intervention to maximize the effect, say sources with direct knowledge of government tactics and market players.

"Technically it's possible. People talk about the euro-yen market being too small, but that's not an obstacle," said a policymaker with direct knowledge of the matter. Another source expressed a similar view. Both declined to be named due to the sensitivity of the subject.

While policymakers do not draw any line in the sand, some market players expect the chance of action to rise if the euro falls toward 95 yen and pushes the dollar along the way near its record low of 75.31 yen, or Tokyo's Nikkei average below 8,000. The Nikkei closed at 8,639.68 on Thursday.

The euro's drop to a 11-year low on Monday after S&P cut ratings for nine euro zone nations and finance minister's warnings that he was watching the euro-yen moves closely stirred market speculation that Tokyo might step in and buy euros.

Yet with the euro off its lows trading near 99 yen and the dollar roughly steady around 76.50 yen the threat of imminent action has receded.

Tokyo is also wary of pulling the trigger after Washington criticized last year's solo interventions to curb yen rises against the dollar, and given that the yen's gains against the euro are primarily caused by weakness of the single currency.

"The euro's decline is driven by Europe's debt problems and the weakness of its economy. In that sense, it broadly reflects fundamentals," the second source said.   Continued...