Eisuke Sakakibara, the ministry's director of international affairs, said stronger economic growth will probably lead the Bank of Japan to double its discount rate to 1.0 per cent "in the coming year".
"Talk of a possible rate increase has been weighing on the dollar for weeks," said Ben Strauss, a currency trader at Bank Julius Baer. "Sakakibara said he is looking for a rate hike, and many people expect one this summer."
The Bank of Japan has kept the discount rate, which it charges on overnight loans to Japanese banks, at a record low since September 1995. An increase would make bank deposits and bonds denominated in yen more attractive.
The dollar's fall to 115.65 yen on Friday in New York wiped out most of the week's gains and it ended little changed from the previous Friday, steadying after a 12 per cent drop against the yen between 1 May and 20 May.
Hedge fund managers and Japanese exporters were the main buyers of yen, traders said.
"Some people are still trying to get out of their long dollar-yen positions," said Kisoo Park, senior currency trader at Bank of Boston. The bank saw dollar sales by hedge funds and exporters, he said.
Some of those exporters and fund managers failed to sell dollars during its recent slide against the yen. So they used the dollar's rebound during the middle of the week as an opportunity to sell at higher levels.
Toshiba Corp, the Japanese electronics company, is one exporter looking to unload dollars. "We plan to sell dollars on any rally," said Akira Shimura, the company's foreign exchange manager.
Still, many traders expect the dollar's decline to be short-lived. Sakakibara's real message was that Japanese interest rates won't be raised soon, they said. Japanese politicians have been floating the idea of a rate rise in July to appease constituents who depend on bond and savings-account interest for income.
Sakakibara's comments "lets the political crowd know he understands their concerns," said one trader. Still, "the economic reality will prevent a rise in rates any time soon. Talking about the next year is safe because it's far out on the horizon," he said.
Japanese Finance Minister Hiroshi Mitsuzuka also let it be known last week that he supports the central bank's low interest rate policy.
Given the stronger economy and higher interest rates in the US than overseas, the dollar could reach 120 yen and 1.7250 marks in the next month, said Robert Katz, a currency trader at MTB Bank. "People's focus is likely to come back to the strong performance of the US economy." Copyright: IOS & Bloomberg