By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japan is not ruling out market intervention to curb the yen's rise, government sources said on Wednesday, sending the strongest signal yet that the currency's march toward all-time highs may spur Tokyo into action.
In the past weeks, Japanese officials have repeatedly tried to talk the yen down out of concern that it will trip up an export-driven recovery, but markets doubted they would risk going solo and all but ruled out a coordinated intervention.
Government sources told Reuters, however, intervention was possible and one said acting alone was always an option, echoing an earlier report in the Nikkei newspaper.
Still, investors remained skeptical whether intervention alone would do much to stem a rise that took the yen to a 15-year high against the dollar and a nine-year peak against the euro on Tuesday, battering the stock market.
Tokyo shares are sensitive to the yen's moves given that several heavyweights are major exporters such as Toyota, Honda or Sony.
"Even if we see a short-term bounce in dollar-yen, I still think the risk is that we head lower before all is said and done," Robert Rennie, chief currency strategist at Westpac Bank in Sydney told Reuters Insider.
Finance Minister Yoshihiko Noda sharpened his rhetoric, telling reporters he would respond appropriately as needed, an expression he has not used before in his efforts to curb the rally that threatens to make Japanese goods less competitive and eats into exporters profits.
Noda later met Prime Minister Naoto Kan and other ministers, but said he had received no specific instructions on the currency.
The sharp yen rise and resulting declines in the Nikkei average have made it more likely that the Bank of Japan will further ease monetary policy before its scheduled rate review on September 6-7, sources told Reuters.
The Nikkei closed down 1.7 percent on Wednesday, its lowest in 16 months.
Speculators doubt the Bank of Japan is ready for drastic steps. "If they really want to do something on the yen ... they have to create inflation expectations," said Martin Schulz, a senior economist at Fujitsu Research Institute.
"But I don't think the BOJ would go in that direction."
Speculators held a net long position in the yen of 49,969 contracts in the week ended August 17, data from the Commodity Futures Trading Commission showed. That was down slightly from the previous week but still marked a shift compared with early June, when speculators had held a net short position in the yen.
TOUGHER TALK, PARTY DISARRAY
The yen has risen nearly 10 percent against the dollar so far this year, with the U.S. currency weighed down by doubts about the U.S. recovery and falling Treasury yields, along with other global factors that Tokyo has little power to influence.
The Nikkei newspaper said Japan's finance ministry would consider intervening unilaterally if the yen rose at a pace of several yen to the dollar in a single day.
The dollar sank as low as 83.58 yen at one point on Tuesday but rose to 84.32 yen on Wednesday, helped by the Nikkei report. The euro fell as much as 2.2 percent to 105.44 yen on Tuesday. It was around 106.62 yen on Wednesday.
Seeming disarray in the novice ruling Democratic Party as speculation simmers that Kan may face a challenge in a September 14 party leadership vote is adding to a perception that policymakers will not act decisively.
The Democratic-led government, which took power for the first time just a year ago, is working on steps to help the economy without further inflating a huge public debt, but the content might shift after the party vote.
Japan has not intervened in the currency market since March 2004, when it ended a 15-month 35 trillion yen ($415.9 billion) selling spree aimed at preventing a strong yen from killing an economic recovery.
Annual growth in Japan's exports slowed less than expected in July, finance ministry data showed on Wednesday, due to a pickup in shipments to the United States and Europe.
Yet economists expect export growth to slow in the coming months due to signs the global economic recovery is faltering.
BOJ LINES UP OPTIONS
Japanese companies have become more resilient to yen strength and enjoyed a sharp jump in profits for the April-June quarter, but every 1 yen rise against the dollar will trim recurring profit at major manufacturers by 0.9 percent this fiscal year, according to an estimate by Nomura Securities.
Tokyo will probably have difficulty convincing its U.S. and European counterparts to jointly step into the markets, given that a weakening of their currencies is helping their exports.
Noda declined to comment on talk he might meet U.S. Treasury Secretary Timothy Geithner, as did a U.S. Treasury official.
Markets have speculated for weeks that rather than intervening on its own, Japan would opt for monetary easing. The most likely scenario is for the BOJ to increase the size or extend the duration of a short-term fund supply scheme put in place in December, sources familiar with the matter say.
($1=84.14 Yen)
(Additional reporting by Rie Ishiguro, Yoko Kubota and Kei Okamura; Writing by Linda Sieg and Stanley White; Editing by Tomasz Janowski)
