Japan vows to stem yen gains as BOJ meeting nears

Japan kept markets on guard for currency intervention and central bank monetary easing as the finance minister vowed to stem the yen's rise and the prime minister voiced concern over economic recovery on Wednesday .

The yen held broadly steady against the dollar as recent repeated jawboning by Japanese authorities kept markets wary of intervention to weaken the currency, while a deal to raise the U.S. debt limit eased pressure on the U.S. currency.

The pause in the yen was tentative, given lingering worries that the United States faces a ratings downgrade and that Europe's debt crisis will spread further. These concerns could push the yen higher again, forcing Japan to sell its currency for the third time in about a year.

"I don't think currency markets are reflecting economic fundamentals at all ... We will continue to watch market moves carefully," Finance Minister Yoshihiko Noda told lawmakers.

He declined to comment on whether Tokyo would intervene in the currency market, including the timing of any such move.

Swiss policymakers on Wednesday cut the target interest rate to stem gains in the other rapidly strengthening currency and said they would take further measures if necessary.

Meanwhile in Tokyo, Prime Minister Naoto Kan applied pressure on Bank of Japan Governor Masaaki Shirakawa at a regular gathering of cabinet ministers to discuss risks to the economy.

"We have talked about overseas risks posed by the U.S. debt ceiling, Europe's debt crisis and the worries that many have about currency and stock market moves," Kan said at the end of the meeting.

"Japan's economy is in the process of recovering from disaster, so we must closely watch currency moves. We want the BOJ to continue to support the economy."

The yen hovered around 77.16 yen to the dollar, after it soared on Monday within a hair's breadth of March's record high of 76.25 yen.

EYES ON U.S.

Moody's Investors Service said it had confirmed the United States' top AAA rating but assigned it a negative outlook after lawmakers passed a deal to raise the U.S. borrowing limit and reduce the deficit.

Despite the debt agreement, the dollar was unable to make much headway, weighed down by worries about the health of the U.S. economy following a batch of dour data.

Markets also await possible action by ratings agency Standard & Poor's, which has yet to give its opinion of the debt deal hammered out in Washington that many predict will include a cut in its top rating for the world's biggest economy.

Japan has been priming the markets for currency intervention since the yen tested its record high, signaling it may try to tame the currency with a combination of yen-selling and monetary easing.
Noda has made it plain that the yen was too strong for Tokyo's taste and has said he is in discussions with the Bank of Japan and international partners about the yen's strength.
Japanese officials fear that the currency's near 5 percent surge in the past month will harm the economy, which skidded into its second recession in three years following the March 11 earthquake and tsunami.

The Bank of Japan will probably ease its monetary policy if the finance ministry decides to intervene and sell yen, sources familiar with the central bank's thinking have told Reuters. The central bank is due to review its policy on August 4-5.

Shirakawa signaled the central bank's readiness to ease policy at its two-day rate review, saying the nine-member board will scrutinize the negative impact recent yen rises could have on Japan's economy.More..