By Leika Kihara and Izumi Nakagawa
TOKYO (Reuters) - Japanese Prime Minister signaled that Japan was ready to keep intervening to curb gains in the yen, as a deterioration in manufacturing confidence underscored the threat of a strong currency to the fragile economic recovery.
Naoto Kan said he would take decisive steps if needed to stem rises in the yen, Jiji News Agency reported, a day after Japan intervened for the first time in six years, triggering a sharp fall in the yen from 15-year highs on the dollar.
Japan unleashed a wave of yen selling on Wednesday estimated at more than 2 trillion yen ($23.3 billion). The dollar has strengthened to 85.4 yen from around 83 before the intervention, which started in Tokyo and carried through to New York trading.
Analysts say Kan wants to appear proactive on tackling yen strength after winning a ruling party leadership race on Tuesday, and that the government may pressure the central bank to ease policy further to complement currency intervention.
"He (Kan) is trying to send a message of his party's solidarity. He is showing the strong intention of Japan to take decisive action through intervention," said Ayako Sera, market strategist at Sumitomo Trust & Banking.
"But he and the finance minister may find if difficult to explain Japan's stance to the international community," given that China is also under pressure to make its currency more flexible to help rectify global imbalances, she added.
FURTHER EASING?
The Bank of Japan has no plan to support the government's intervention with an immediate easing of monetary policy, but it is ready to act in early October if the economic recovery remains under threat, sources have said.
But BOJ Governor Masaaki Shirakawa said on Thursday that quantitative easing policies had a limited effect on stimulating the economy and prices.
"We hardly observe the fact that massive expansions in central bank balance sheets result in an increase in inflation in advanced economies," Shirakawa said in a speech at a conference.
Yoshimasa Maruyama, an economist at Itochu Corp, said further monetary easing by the central bank will depend on the size of currency intervention, given that they work in tandem.
"The greater the intervention, the greater the chance of further BOJ easing," he said.
A Reuters poll published on Thursday showed that Japanese manufacturing confidence worsened in September from the previous month for the first time in nearly a year as companies struggle with a strong yen and sluggish overseas growth.
The monthly poll, which has a 95 percent correlation with the BOJ's closely-watched tankan survey of business sentiment, showed the manufacturers' sentiment index fell 5 points from August to plus 17, down for the first time since October 2009.
Service-sector sentiment improved 6 points to minus 4 but has remained in negative territory since June 2008.
Compared with three months ago, however, manufacturers' mood was moderately better, pointing to continued improvement in the BOJ's next quarterly tankan, which is due out on September 29.
The pace of quarterly gains in the Reuters Tankan has nevertheless slowed somewhat from earlier this year and is seen declining further in the next three months, boding ill for the overall trend in the BOJ's key survey and potentially adding to pressure on the central bank to act.
The BOJ eased policy at an emergency meeting on August 30 and will hold its next rate review on October 4-5.
"The BOJ tankan will likely show manufacturing sentiment improving further but only slightly given that companies are growing more cautious about the outlook after the Reuters poll was taken," Maruyama said.
Sentiment is seen deteriorating further to plus 2 in manufacturing and minus 9 in the service sector in the three months to December, according to the August 27-September 13 poll of 400 big firms, of which 229 responded.
The indexes in the Reuters Tankan are derived by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure means pessimists outnumber optimists.
(Additional reporting by Kaori Kaneko, Tetsushi Kajimoto and Yoko Kubota; Writing by Tetsushi Kajimoto; Editing by Edmund Klamann and Nathan Layne)
