Japan's foreign reserves surged to an all-time high in August after it spent a record amount to intervene in the currency market, aiming to curb a sharp yen rise that could derail the economy's recovery from the March earthquake and tsunami.
Newly appointed finance minister Jun Azumi said on Monday that he would tell attendees at his first Group of Seven (G7) financial leaders meeting later this week that the yen's strength was bad both for Japan and for the world economy.
Azumi also said he was ready to step into the currency market to counter speculative moves, although Japan would likely struggle to gain G7 support for intervention.
Growing fears of a tip back into global recession are piling pressure on G7 finance chiefs meeting in France on Friday to moderate the austerity drives in some rich economies and to unleash a new round of monetary stimulus.
"There is no change in Japan's stance to take action in the foreign exchange market if needed. And Japan will probably try to get understanding from G7 members that the yen's rise has been not only rapid but also driven by speculative moves since the disaster, as the authorities have been saying," said Michiyoshi Kato, senior vice president for forex sales at Mizuho Corporate Bank.
"Although European nations are unlikely to go along with joint intervention, they may keep quiet if Japan conducts solo intervention."
Japan's foreign reserves rose to a record $1.22 trillion at the end of August compared with $1.15 trillion at the end of July, the Ministry of Finance said on Wednesday.
Japanese authorities spent a record 4.5129 trillion yen ($58.5 billion) on currency intervention in August, previous finance ministry data showed, reflecting a move into the market on August 4. That far exceeded the 2.125 trillion yen it sold on September 15 of last year, the previous daily record.
Japan's August 4 intervention gave the dollar a brief boost above 80 yen but it quickly lost ground and hit a record low of 75.941 yen two weeks later.
The dollar was trading around 77.50 yen on Wednesday after the Swiss National Bank shocked markets the previous day by setting an exchange rate cap on the soaring franc.
The bold Swiss move may force Tokyo's hand and prompt intervention to weaken the yen if it diverts more safe-haven flows into the Japanese currency.
In March, Japan spent 692.5 billion yen when the Group of Seven (G7) countries conducted its first joint foreign exchange intervention in more than a decade, after the yen shot up against the dollar in the wake of the March 11 natural disaster.
The rise in Japan's foreign reserves also reflected declines in U.S. Treasury yields that pushed up Treasury prices, with the benchmark 10-year yield falling to 2.225 percent at the end of August from 2.798 percent a month earlier.
Gains in gold prices also inflated the value of the government's holdings, the ministry said. Gold was at $1,813.50 per ounce at the end of August, up from $1,628.50 at the end of July.