By Charlotte Cooper and Shinji Kitamura
TOKYO (Reuters) - Japan intervened in global currency markets on Wednesday to sell yen for the first time in six years in a bid to stop its relentless rise from threatening a fragile economic recovery.
After this week's victory in a party leadership contest, Japanese Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting the yen's strength which has weighed on stock prices and corporate profits.
But Japan's solo move could complicate delicate efforts to encourage China to let its currency float freely. European officials said coordinated action was a more effective means of adjusting exchange rates and a U.S. lawmaker called Japan's action "deeply disturbing".
The Japanese Prime Minister told reporters that Wednesday's intervention had some effect but the government was watching foreign exchange moves with a sense of urgency.
A Japanese monetary policy source told Reuters that Japan continued to intervene in the currency market during New York trading hours, and traders at major foreign exchange dealers estimated Wednesday's efforts amounted to around $20 billion.
Lee Jin-Woo, head of research at NH Investment and Futures in Seoul, said Japan should not expect any help from other countries in driving down the yen because most other advanced economies are grappling with the same problem -- slow economic growth at home which makes exports an economic imperative.
"Japan's authorities have declared war," he said.
Even as the U.S. dollar surged 3.0 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 which ended earlier this year did little to tame the Swiss franc.
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 U.S. Federal Reserve may take more steps to ease monetary policy that could weigh on their currencies.
US DOLLAR JUMPS 3.0 PCT AGAINST YEN
The dollar rose to 85.72 yen from its 15-year low beneath 83 yen, its biggest daily gain in nearly two years. It was last up 3.1 percent at 85.60 yen.
The Japanese currency's rise had brought it closer to its record peak of 79.75 per dollar set in 1995, squeezing exporters' profits, but the slump in the yen on Wednesday helped push Tokyo stock market's Nikkei average up 2.3 percent.
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.
Billionaire financier George Soros said Japan was right to act to bring down the value of the yen.
"Certainly, they are hurting because the currency is too strong so I think they are right to intervene," Soros said at a Reuters Newsmaker event.
ALL ALONE?
Japanese 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.
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, chairman of the Eurogroup of euro-zone finance ministers, said when asked about Japan's intervention.
U.S. officials at the Federal Reserve, White House and Treasury declined to comment.
The concern is that Japan's go-it-alone stance will spur a round of competitive devaluations as other slow-growing countries try to give their own exporters an edge.
In Washington, the timing was particularly tricky. Japan's move came just as a congressional committee began a series of hearings on China's currency policy. U.S. lawmaker Sander Levin, who chairs the committee, called Japan's intervention "deeply disturbing" and said he would follow it closely.
Andrew Busch, global currency strategist at BMO Capital Markets in Chicago, said Japan's action would make it more difficult for Congress to get its message through to China.
"How can the Japanese get a pass to intervene when the Chinese are being criticized for essentially the same activity?" he said.
UNSTERILISED INTERVENTION
Unlike 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.
($1=85.50 yen)
(Reporting by Tokyo newsroom; Additional reporting by Tara Joseph Hui in Hong Kong, Doug Palmer and Paul Eckert in Washington; Writing by Kevin Plumberg and Emily Kaiser; Editing by Mike Peacock and Neil Stempleman)
