Japan sold the yen in the market on Wednesday for the first time in six years, trying to stop the currency's relentless climb from hurting exporters and threatening a fragile economic recovery.
Fresh after a victory in 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.
Estimates vary on how much Japan has spent so far in its first intervention in the foreign exchange market since spending 35 trillion yen in 2003-2004. Dealers talk about 300-500bn yen (£2.34-£3.9bn) though some reports put it closer to 100bn yen.
The US dollar extended its gains against the yen after an official at Japan's Ministry of Finance said intervention was not finished, climbing more than two per cent on the day above 85 yen and nearly two yen above a 15-year low.
Wednesday's action pleased its target audience: major Japanese exporters.
"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 pencilled in the yen at 87 to the dollar in its financial estimates for the 2010/2011 business year.
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, indicating coordinated efforts with the government to support the economy.
The central bank may follow up with additional steps, such as buying more government debt, economists said.
Analysts doubt other countries would help Japan tamp down the yen since they also need weaker currencies to boost exports and growth.
Intense pressure from Washington on China to let its currency strengthen also makes any attempts by major economies to weaken their currencies particularly sensitive.
City A.M. Reporter