Japan sharpens verbal warning vs yen spike

By Leika Kihara

TOKYO (Reuters) - Japan sharpened its warning to currency markets on Thursday in the wake of the yen's rise near record highs against the dollar, keeping markets jittery about the possibility of a second round of intervention.

Markets are also on guard after the Swiss National Bank said it would flood the market with even more francs to dampen demand for its currency, which like the yen is soaring on safe-haven demand.

"We are keeping an extremely close watch on currency moves, while working closely with the global community," Finance Minister Yoshihiko Noda told parliament, issuing a stronger warning than his usual phrase that he is watching markets carefully.

Prime Minister Naoto Kan also told parliament the government will consider what it can do to address what he saw as "somewhat one-sided moves" in the yen, although he will probably not see through any such measures as he has signaled his intention to step down in the coming weeks.

Japan has kept firing warnings to markets against pushing up the yen too much, but that has not kept the currency from rising past levels that triggered last week's intervention.

The yen soared within sight of its record high of 76.25 yen to the dollar, hit just after the March 11 earthquake, as investors sought refuge from risk amid heightening uncertainty over the global economic outlook.

In a sign of how jittery markets are at the possibility of intervention, the dollar briefly jumped above 77 yen in London trading hours after approaching its record low against the yen.

Traders said they had not seen any yen-selling intervention by Japanese authorities and the dollar soon fell back to around 76.50 yen. A Japanese finance ministry official declined to comment on whether the government stepped into the market.

Adding to the woes for Japan's fragile economy, the Nikkei share average fell after U.S. stocks tumbled more than 4 percent as rumors about the health of French banks sparked concern the euro zone's debt crisis could broaden.

BOJ ON ALERT

Last week Japan intervened in the currency market and the BOJ eased monetary policy to ease the pain on the export-reliant economy from sharp rises in the yen. But those steps have done little to stem the broad weakness in the dollar.

Tokyo stands ready to step into the market again if yen rises persist, although market players say it may not be able to sell yen in huge amounts with its Group of Seven counterparts expressing displeasure over Japan's intervention.

Japanese policymakers say a G7 call for coordinated action to ensure market stability, made in a statement issued on Monday, was meant to signal the group's readiness to jointly intervene in the market if currency moves become too volatile.

But markets doubt the United States and European countries are ready for such a move as the G7 statement also says exchange rates should be determined by markets.

Noda has said the G7 finance leaders, in their teleconference on Monday, did not specifically discuss intervention policy, a sign that Japan may not have gained implicit consent to step into the market, let alone any assurance of joint intervention.

Still, there is no guarantee Tokyo will not step in again.

"Every country has its own problems to deal with so it's hard to find common ground," a source familiar with Japan's currency policy said. "Under these circumstances you might have to do something even at the risk of being criticized."

In the event of another currency intervention, the BOJ is expected to maximize the yen-weakening effect by holding off on draining the extra yen that goes into the market, as it did for last week's currency action.

The central bank is also ready to pump huge amount of funds through its market operations on any signs of financial stress or rises in short-term borrowing costs.

If the yen soars above its record high and triggers another sharp fall in equity prices, the BOJ may face pressure to ease monetary policy further even before its next rate review in September, analysts say, although the chances of this are slim.

BOJ officials do not rule out the possibility of further monetary easing, with Governor Masaaki Shirakawa stressing that the central bank will take appropriate action if the economy's recovery prospects come under threat.

But he has also signaled that the BOJ has done what it can for now and hopes to spend more time examining the effect of last week's monetary easing.

(Additional reporting by Stanley White; Editing by Chris Gallagher and Michael Watson)