Markets braced for intervention as yen nudges key 150 level

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By Leika Kihara and Kantaro Komiya

TOKYO (Reuters) -Japanese Finance Minister Shunichi Suzuki on Thursday vowed to take "appropriate steps" against excessive currency market volatility, renewing his threat of intervention as the yen slides to a 32-year low and towards the key barrier of 150.

The Bank of Japan, for its part, ramped up efforts to defend its 0% bond yield cap on Thursday with offers of emergency bond buying, in a show of resolve to maintain the ultra-low interest rate policy that is blamed for pushing down the yen.

The central bank's step underscores the dilemma Tokyo faces in trying to contain unwelcome yen falls, without resorting to interest rate hikes that could derail Japan's fragile recovery.

"Recent rapid and one-sided yen declines are undesirable. We absolutely cannot tolerate excessively volatile moves driven by speculative trading," Suzuki told parliament on Thursday.

"We will continue to take appropriate steps against excess volatility, while watching currency market developments with a strong sense of urgency," he said.

The government, which holds jurisdiction over currency policy, spent 2.8 trillion yen ($19 billion) in dollar-selling, yen-buying intervention last month when authorities acted in the markets to prop up the yen for the first time since 1998.

The yen tumbled to 149.96 against the dollar on Thursday, its weakest since 1990 and near the key psychological barrier of 150 to the dollar, keeping investors on high alert to the possibility of another Japanese intervention in the currency market.

"It seems almost inevitable that USD/JPY will break, but the question is what will happen when it does," said Matt Simpson at City Index. "Not only could it entice further stern ‘words’ from MOF or BOJ officials, but it could also invoke volatility as options at 150 get defended and traders either try to fade the move or book a quick profit."

BOJ Governor Haruhiko Kuroda on Wednesday ruled out the chance of raising the bank's ultra-low interest rates to moderate the yen's downtrend, even as he warned that sharp yen moves would hurt the economy.

While market worries about intervention have kept the pace of yen falls fairly slow, analysts expect the currency to remain on a downtrend as long as the BOJ remains a dovish outlier among a global wave of central banks hiking rates.

The BOJ faces renewed challenges in keeping long-term interest rates stably low with its policy dubbed yield curve control (YCC), under which it pumps money aggressively to cap the 10-year bond yield around 0%.

The central bank offered unscheduled, emergency bond-buying operations on Thursday, as rising global yields pushed the 10-year Japanese government bond (JGB) yield above its implicit 0.25% cap for the second straight day.

"The BOJ likely sent a message to markets, which is having some effect," said Shinsuke Kajita, chief strategist at Resona Holdings in Tokyo. "But it's hard to keep JGB yields from rising, given very strong upward pressure from overseas."

Super-long JGB yields also rose to multi-year lows with the 20-year yield hitting a seven-year high of 1.150% on Thursday, underscoring the difficulty the BOJ faces in swimming against the global tide of rising rates.

The BOJ is widely expected to maintain its massive stimulus programme at its next two-day policy meeting ending Oct. 28.

Once welcomed for the competitive boost it gives exports, the weak yen has become a headache for policymakers as it inflates the costs of already expensive imported fuel and raw materials.

Prime Minister Fumio Kishida told parliament on Thursday the government would take into account slowing overseas growth in deciding the size of new fiscal stimulus.

($1 = 149.8700 yen)