Japan on watch as yen rises and stocks plunge

By Tetsushi Kajimoto and Leika Kihara

TOKYO (Reuters) - Japanese policymakers voiced growing alarm on Tuesday as the yen inched back to highs scaled prior to last week's intervention and global stock markets crumbled under mounting fears of a new financial crisis.

Finance Minister Yoshihiko Noda said he would watch markets with a sense of urgency because they are in a severe state, while Bank of Japan Governor Masaaki Shirakawa said he needs to be particularly mindful of the risks that a strong yen poses to the Japanese economy.

The yen approached its highest level versus the dollar since Tokyo's intervention on August 4, while Asian shares went into a nosedive after a 6 percent decline on Wall Street as the U.S. government's loss of its top credit rating and a piecemeal response to Europe's sovereign debt woes frayed investors' nerves.

"I will pay close attention to market movements with a sense of urgency today," Noda told reporters when asked about the stock market falls and a persistently strong yen despite Japan's solo intervention last week to stem its rise.

The Japanese currency was trading at around 77.13 yen against the dollar, up about 0.8 percent on the day and close to a four-month high of 76.29 yen hit last week before Tokyo intervened and way off post-intervention levels beyond 80 yen to the dollar.

Japan sold a record of more than 4 trillion yen last Thursday to prevent the yen's climb from derailing the economy's recovery from the damage wrought in March by the triple-blow of a massive earthquake and tsunami and a radiation crisis at a damaged nuclear power plant.

The central bank also stepped in, loosening monetary policy by boosting its asset buying scheme by half to 15 trillion yen in a move aimed both at making the intervention more effective and shoring up market confidence.

The effects of the joint effort, Japan's third foray into currency markets in less than a year, have worn off quickly as fears that twin debt crises in the United States and Europe could tip the world economy back into recession drove investors into low-risk assets such as the yen, gold and the Swiss franc.

Additional solo intervention could also meet with limited success as Japan is unlikely to get the necessary cooperation from the Group of 20 and Group of Seven countries.

"For Japan, there aren't really any policy alternatives left to stop yen strength," said Junya Tanase, chief foreign exchange strategist at JPMorgan Bank in Tokyo.

"It is difficult for G20 to coordinate on policy because the group is so big. The G7 can coordinate to provide liquidity, but their basic stance is one that is critical of intervention."

BOJ Governor Shirakawa told parliament he still expects Japan's economy to return to moderate growth, but highlighted growing discomfort with a strong yen and increased overseas risks to the economy.

"It's happening against the backdrop of weakness in the global economic recovery, and uncertainty over U.S. and European fiscal problems," Shirakawa said, referring to the rising yen.

"These factors, coupled with the short-term downside effect from yen rises, hurt (Japan's business) sentiment."

Minutes of the central bank's meeting in July showed that its board was increasingly worried about the global economic outlook and two of its members were already advocating further monetary easing.

Despite Japan's own troubles with public debt twice the size of the $5 trillion economy, the post-quake recession and a political stalemate, its deep bond market is seen as one of the relatively few safe investments both by Japanese and foreign investors.

Global stock markets plunged on Monday as the G7 finance ministers' and central bankers pledge over the weekend to help smooth markets if needed provided little reassurance.

The European Central Bank swept into the bond market to buy up Italian and Spanish debt and sling a safety net under the euro zone's third- and fourth-largest economies. But bickering persisted in Europe over a longer-term rescue plan.

Noda said Monday's G7 statement helped to ease market uneasiness and he would keep in close contact with his G7 partners in the coming weeks.

Noda also told lawmakers he does not intend to resign his post, rejecting a report in the Sankei newspaper that he will give up the role of finance minister in a bid to replace the prime minister.

(Writing by Tomasz Janowski; Editing by Kim Coghill)