By Chisa Fujioka
TOKYO, Feb 20 - The dollar dithered in a tight range against the yen on Wednesday as the market played guessing games over Japanese policy. Hopes for bold policy steps to stave off financial chaos at the end of the fiscal year in March have helped distance the yen from recent three-year lows, but traders were starting to lose faith. "There's still some hope the government will come through with new policy steps, but doubts are setting in," a trader at a Japanese trust bank said. Aiding the yen in morning trade were reports Bank of Japan (BOJ) Governor Masaru Hayami had urged Prime Minister Junichiro Koizumi to consider injecting public funds into fragile banks. The reports revived hopes of an imminent recapitalisation package, just a day after government ministers disappointed the market by saying there was no need for public money for now. But a top government spokesman played down the reports later in the morning, saying the meeting had not focused on the subject of possible public-fund injections. By afternoon, the dollar edged back to 133.37/40 yen JPY= from an earlier dip to a 133.12 yen to a three-month low. That proved lucky for the euro EUR= , which staged a rally all the way from $0.8666 lows to stand at $0.8766/67 in Tokyo. The bounce left the euro technically bullish, although analysts said it needed to clear a double top around 88 cents to suggest this was more than just a correction. The euro was also higher against the yen at 116.90/117.01 EURJPY=R from lows around 115.50 on Tuesday. FURTHER EASING? Japanese media said Hayami had offered to consider further monetary easing after assessing the government's plans to stem deflation, perhaps by expanding purchases of JGBs to 1.0 trillion yen ($7.48 billion) a month from the present 800 billion yen. A further expansion in liquidity could weigh on the yen through the supply side, but if investors thought Japan was finally coming to grips with its problems, it could equally lead to greater demand for Japanese assets. "The expectation that Japan might come up with new policy measures is positive for the yen, although for now it's just a factor limiting yen selling and not one inviting active yen buying," said Koji Fukaya, chief forex analyst at Bank of Tokyo-Mitsubishi. Japanese repatriation of funds ahead of the fiscal year-end is expected to taper off soon and traders expect the dollar to test higher after trading in a range in the near-term. TOO SUCCESSFUL? But some also fear the dollar's success in recent years could be its undoing because U.S. industry is increasingly vocal about the resulting loss of international competitiveness. The U.S. National Association of Manufacturers railed against U.S. Treasury officials on Tuesday, claiming fading U.S. exports from an "extremely overvalued" dollar had cost about 400,000 factory jobs since mid-2000. There was also concern that angst over accounting practices in the wake of the Enron Corp ENRNQ.PK debacle could curb offshore appetite for corporate bonds and equities and make it harder for the United States to fund its massive trade deficit. Analysts did note that such fears had been overblown in the past. Even when the equity bubble burst, foreigners merely switched their flows to corporate paper. Between last January and November, they bought $217 billion of bonds compared with $104 billion of shares. So far demand for corporate paper is holding up, although investors are tending to favour issues with higher ratings. But analysts see signs that issuance itself could taper off because companies without top-notch ratings are finding it harder to find lenders while others are concentrating on cleaning up their balance sheets rather than borrowing more. Issuance has been running at a healthy $10.5 billion a week so far this year, but registrations for issues fell sharply in January, suggesting a slowdown lay ahead. If so, foreigners would have less new bonds to buy and that could hurt the dollar. ($1=133.65 Yen)