TOKYO, Sept 25 - The yen took a breather on Thursday as wariness of intervention and a retreat in Tokyo share prices tempered a bull run that had taken the currency to three-year highs against the dollar earlier in the week. Speculation lingered that a Group of Seven (G7) statement last week calling for flexibility in exchange rates would prevent the Bank of Japan (BOJ) from continuing its yen-selling intervention. But traders suspected that the Japanese authorities would not tolerate an abrupt rise in the yen to 110 to the dollar especially at the expense of stock prices.
Japan's top financial diplomat, Zembei Mizoguchi, said that the authorities were ready to intervene against a rising yen if necessary. "We are seeing speculative moves, and that's not appropriate. We will always be ready to act as needed and will be watching the market," Mizoguchi, the vice finance minister for international affairs, told reporters as he arrived at his office. Having risen to 112.02 yen, the dollar was quoted at 111.85/90 yen at 0236 GMT, compared with about 111.80 yen in late New York trade on Wednesday. The dollar was also steady against the euro at around $1.1479/81 to the single currency versus $1.1485/89. "There is still a feeling that they (the BOJ) might come in any time now," said Hiroyuki Watanabe, a foreign exchange manager at Shinsei Bank. "A lot of people have accumulated long yen positions and are ready to take profit. I would expect the market to careen to and fro between 110 and 115 for now," he said, adding that he expected the yen to gravitate toward 110 in the absence of intervention.
NIKKEI PULLBACK
The recent upward pressure on the yen abated due in part to a sharp pullback in the Tokyo stock market's Nikkei average, given that a rebound of more than 40 percent in the Nikkei from 20-year lows set in April had been a major driver behind the yen's recent rise. The Nikkei average <.N225> ended the morning session down 2.34 percent at 10,256.95 after earlier hitting a four-week intraday low of 10,225.48. Traders said there were also diverging views in the market on whether Japan, which had spent a record nine trillion yen ($80.47 billion) in currency market intervention in the first seven months of the year, had really changed its strategy. "I feel that Japan may not intervene the way it used to, which is to defend a certain level of the yen," said Toru Umemoto, currency strategist at Morgan Stanley Japan. "Japan has spent so much money on intervention, but criticism from other nations has grown, and because of fund inflows to Japan, intervention has begun to lose effect," he said. Junya Tanase, forex strategist at JP Morgan Chase in Tokyo, sees the yen strengthening further.
"We have revised our forecast so that the dollar could fall to 110 yen, from our previous forecast of 115 yen, as we think the Japanese authorities will find it difficult to intervene after G7," said Tanase. Discrepancies between Japanese and U.S. officials on currencies also caused some confusion in the market. Haruhiko Kuroda, formerly Japan's top financial diplomat and now a special adviser to the prime minister, said on Wednesday that it was wrong to assume Japan's intervention policy would change because of the G7 statement. He said the sentence on flexibility was aimed at the Chinese yuan, which is virtually pegged to the dollar. However, a top U.S. Commerce Department official said on Wednesday that the G7 statement should be seen as a message to Japan as well as China. And William Poole, president of the Federal Reserve of St Louis, said on Wednesday he did not see the dollar's fall since the G7 meeting as a "sharp drop". ($1=111.84 yen)//