The Bank of Japan signaled it may increase the supply of yen in a bid to halt a three-month, 17 percent rise in the currency's value that is threatening the nation's economic recovery.
[In early trading in Tokyo Monday morning Tokyo time, the dollar gained against the yen, the Associated Press reported. The dollar was trading at 105.60 yen, up 1.18 yen from late Friday in Tokyo and also above its late New York level of 104.17 yen on Friday.]
The bank's move followed a Saturday communique by finance leaders of the top seven industrial countries in which they welcomed pledges from Japan to speed up its economy and expressed "concern" over the high value of the yen.
On Sunday, Japanese central bank officials took the rare step of releasing a statement here yesterday saying that they are "exploring how we could improve money market operations" to assure greater liquidity in Japan.
"The bank is prepared to use the flexibility it has in the context of the present monetary policy stance to respond appropriately and timely to developments in the economy as well as financial markets, including the foreign exchange market," the statement said.
Bank of Japan Governor Masaru Hayami said the central bank's stance was "misunderstood" when it voted Tuesday to leave monetary policy unchanged. The bank had been under pressure to expand the money supply to weaken the yen's value and spur the economy.
Finance ministers from the Group of Seven industrial countries said the bank may be willing to expand the money supply to slow the yen's rise.
The G-7 ministers signalled that for now it's up to Japan alone to take action to slow the soaring value of the yen.
"We share Japan's concern about the potential impact of the yen's appreciation for the Japanese economy and the world economy," the ministers said in a communique released after their meeting Saturday, but they mentioned no steps they would take to bring it down.
The yen's rise against the dollar and euro in the past three months threatens to cut into the profits of Japanese exports, a blow to some of the country's biggest companies.
Yet while the G-7 agreed that the yen's rise could derail Japan's recovery from its worst recession since World War II, the leaders pledged only to "continue to monitor developments in exchange markets and cooperate as appropriate."
That matches word for word the declaration after the last G-7 meeting in April and suggests that the G-7 countries aren't prepared to engage in a joint effort to weaken the yen. The G-7 is made up of the United States, Britain, Canada, France, Germany, Italy and Japan.
Still, the statement noted a pledge by Japanese authorities to continue the government's fiscal stimulus program and "to provide ample liquidity until deflationary concerns are dispelled."
Other members of the G-7 went out of their way to call attention to the wording on Japan and the yen.
"There is a paragraph in the communique on Japan that you will want to read carefully," U.S. Treasury Department Secretary Lawrence Summers said. "Japan was the key focus of discussion."
While Summers said it "wouldn't be useful" to discuss what Japan or the G-7 might do next, Italian Treasury Minister Giuliano Amato told reporters the "G-7 does not rule out intervention as an instrument of cooperation."
With short-term interest rates near zero, Japan's central bank can't lower borrowing costs to stimulate growth. The only monetary policy options are for the bank to simply put more money into circulation by buying Japanese government bonds, or if the Finance Ministry sells yen for dollars or euros, by leaving the excess yen in circulation.
What course the Bank of Japan follows will depend on how markets react to the statements from the G-7 and Hayami, Finance Minister Dominique Strauss-Kahn said. "We'll wait and see what the results are," he said.