Traders said the central bank had been buying dollars and selling yen in an attempt to curb the strength of the Japanese currency. Japan's government is concerned that the recent rise in the yen - which hit a 28-month high on Monday - could undermine the competitiveness of leading manufacturers.
This was the first time the BoJ had bought dollars in the foreign exchange market since early 1996. Dealers speculated that the move had cost the Japanese authorities between pounds 1.5bn and pounds 3bn.
The BoJ did not confirm or deny the intervention reports, but comments by the finance minister, Kiichi Miyazawa, were taken as a signal that the Bank had been active in the financial markets. Mr Miyazawa said that "government experts have taken steps" following the yen's rapid rise against the dollar.
In early trading, the dollar recorded its largest one-day gain against the yen since 1993, traders said. The US currency pared some of its gains later after Robert Rubin, the US Treasury Secretary, said the dollar policy was unchanged. In early New York trading the dollar was at 112 yen, up more than 3 yen from Monday's close.
Analysts said several factors lay behind the yen's surge, including worries about the impact of the Brazilian crisis on the US, the reluctance of Japanese investors to save money overseas and the large Japanese current account surplus. Experts predicted the BoJ would be forced to intervene again in coming days. Michael Lewis at Deutsche Bank said: "This looks like the first of many skirmishes between the Bank of Japan and the currency markets."
Avinash Persaud at JP Morgan said: "As long as investors shy away from the markets, current accounts will drive exchange rates. I see the dollar testing 105 yen again."
The euro benefited from the BoJ intervention, rising 4 yen in New York trade. The surge in the euro coincided with a survey of fund managers predicting the new currency would be the world's strongest in 1999. According to the survey by Merrill Lynch/Gallup, 81 per cent of fund managers expect the euro to be the world's strongest currency this year. Three-quarters expect sterling to weaken against the euro.
Trevor Greetham, Merrill Lynch global strategist, said: "Fund managers love the euro because the alternatives don't look good. The dollar is weak, Japan has structural problems and falling base rates reduce sterling's attractiveness".Reuse content