By Charlotte Cooper and Shinji Kitamura
TOKYO (Reuters) - Japan intervened in the currency markets on Wednesday to sell yen for the first time in six years and promised more to come in a bid to stop its relentless rise from threatening a fragile economic recovery.
Fresh after victory in a party leadership contest, Japan's Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits.
Kan told reporters that Wednesday's intervention had had some effect but the government was watching foreign exchange moves with a sense of urgency.
A Japanese senior government official would not rule out currency intervention in European hours and said Tokyo was ready to step into markets in New York hours if necessary.
Even as the dollar surged as much as 3 percent on the day against the yen, doubts about the ultimate effectiveness of Japan's unilateral yen selling spree abounded.
A 15-month solo effort by Switzerland to weaken its currency did little to tame the Swiss franc, and European Union officials waded in to say coordinated action always proves more effective.
Aside from apparently acting alone, Japan faces the stiff task of trying to put a halt to yen strength while other major central banks such as the Federal Reserve may be considering additional steps to ease policy that could weigh on their respective currencies.
"It is far less clear that intervention will be effective in a world of zero interest rates and excess liquidity, but we think that it still makes sense for Japan to take action to try to arrest yen strength," said Richard Jerram, chief Asia economist at Macquarie Securities in Tokyo.
ALL ALONE?
The dollar was up 3.1 percent at 85.63 by 1230 GMT (8:30 a.m. EDT), on track for its biggest daily gain in nearly two years. It fell to a 15-year low beneath 83 yen overnight, which prompted Tokyo to act.
Finance Minister Yoshihiko Noda, who will reportedly keep his post after a cabinet reshuffle, indicated Tokyo acted alone.
Noda said he was in contact with authorities overseas, and analysts expected Japan to be spared international criticism.
But a European Union source said Japan had not even informed the Europeans, or the United States, about the intervention.
U.S. officials at the Federal Reserve and the Treasury declined immediate comment.
The EU offered some sympathy for Tokyo's plight, saying too rapid yen appreciation could threaten economic recovery. But a top official said coordinated action would have been better.
"Unilateral actions are not the appropriate way to deal with global imbalances," Jean-Claude Juncker, chair of the Eurogroup of euro zone finance ministers, said when asked about Japan's intervention.
Euro zone sources said earlier this month that there had been no discussions of European support for potential action by Japan, a clear signal that coordinated help would not have been forthcoming.
Analysts doubt other countries would help Japan soften the yen because they need weaker currencies to boost exports and growth. Intense pressure from Washington on China to let its currency strengthen also makes attempts by major economies to dampen their currencies particularly sensitive.
UNSTERILISED INTERVENTION
Estimates varied on how much Japan had spent in its first intervention in the foreign exchange market since 2003-2004, when it forked out 35 trillion yen ($409 billion).
Traders cited market estimates that Wednesday's efforts amounted to around 1.5 trillion yen ($17.67 billion).
Unlike in previous forays, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said.
That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.
Authorities that sell their own currencies to weaken them often issue bills to "sterilize" the funds and keep the excess money from becoming inflationary. In Japan's case, it wants to promote inflation since the economy has been dogged with deflation for much of the past decade.
"The government's aim, and the aim of authorities in general, is to add monetary injections to the economy," Callum Henderson, global head of foreign exchange strategy with Standard Chartered in Singapore, told Reuters Insider.
"Unsterilized intervention should be yen-negative, it should be very bullish for higher risk assets, very bullish for stocks in Japan and obviously it should add to the impact of the intervention of the yen," he said.
The central bank may follow up with additional steps such as buying more government debt, economists said.
LONG BATTLE?
Analysts doubted whether Kan's government was ready for a protracted battle with markets similar to the 15-month yen selling spree earlier this decade, since that campaign proved ineffective at halting the yen's strength for long.
"The amount of intervention isn't likely to be as much as Japan was spending the last time it intervened, so it won't be enough to stop dollar/yen from falling. It is also unlikely that other countries will co-operate," said Junya Tanase, currency strategist at JP Morgan in Tokyo.
Japan need only look to Switzerland. The Swiss franc shot to a record high against the euro two weeks after the country's central bank ended a 15-month policy in June 2010 of weakening its currency.
Finance minister Noda declined to say if authorities had bought dollars. But two traders said the Bank of Japan, which acts on the ministry's behalf, appeared to have bought dollars around 83 yen at the start of the intervention.
"We will take decisive steps if necessary, including intervention, while continuing to closely watch currency market moves from now on," Noda told reporters.
Wednesday's action pleased Japanese exporters, many of whom had expected the yen to average 90 per dollar this fiscal year.
"We applaud the move by the government and the Bank of Japan to correct the yen's strength," Japan's No. 2 automaker Honda Motor Co. said in a statement.
Honda has penciled in 87 yen per dollar in its estimates for the fiscal year to March 2011.
Kan was re-elected as ruling party leader on Tuesday, decisively fending off a challenge from powerbroker Ichiro Ozawa, an outspoken advocate of intervention.
"There were views in the market that Kan was more tolerant of a higher yen and the yen rose after he won the ruling party leadership vote yesterday," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
"The government probably wanted to stamp out those views. But the question is: Will the yen stop rising from here? It's not clear."
The Japanese currency's rise has brought it closer to its record peak of 79.75 per dollar set in 1995 and has weighed on the Tokyo stock market's Nikkei average, which climbed 2.3 percent on news of the intervention.
($1=85.50)
(Reporting by Tokyo newsroom; Additional reporting by Tara Joseph Hui in Hong Kong; Writing by Kevin Plumberg; Editing by Mike Peacock)
