The yen surged to a six-week high yesterday on newspaper reports that Japan had ended its policy of intervening in the foreign exchange market to weaken its currency.
Despite denials by officials at the Japanese Ministry of Finance (MoF), the yen rose sharply against the dollar. It rose close to ¥105, a level that has previously triggered intervention.
In a frenetic day on the currency markets the dollar hit its highest this year against the euro on speculation that the European Central Bank will cut interest rates this week.
The Times newspaper quoted unnamed Bank of Japan officials as saying that the world's second-biggest economy no longer needed a weaker yen to bolster exports.
The MoF denied the report, insisting that it - and not the Bank - was in charge of foreign exchange and intervention policies.
However analysts said the reports purely added to current speculation that the government was planning to abandon intervention in the face of a strengthening economy and rising stock market.
Tokyo's benchmark Nikkei share index hit a 22-month high yesterday while economic growth rose to an annual 6.4 per cent, the fastest in 13 years in the final quarter of last year.
"The market is going to continue to buy the yen and they are buying yen because of a strong economy," said Patrick Bennett, a strategist with Commerzbank in Singapore.
There is also growing criticism of Japan's strategy, which has seen it buy dollars at an expensive exchange rate and invest the money into low-yielding short-term US Treasuries.
Alan Greenspan, the chairman of the US Federal Reserve, recently warned that as fears of deflation in Japan eased, the monetary consequences of continued intervention "could become problematic".
Meanwhile the euro fell to within a half a cent of the key $1.20 level against the dollar after the European Commission said sluggish consumer spending cast a shadow over the short-term outlook.
"It would be ridiculous for us to rule out a rate cut as early as this week," said Ken Wattret, euroland economist at BNP Paribas.
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