Japan will take decisive action against any speculative moves in the currency market, Finance Minister Yoshihiko Noda said, signaling Tokyo's readiness to intervene to stem further yen rises after its spike to a record high last week.

Noda said he saw recent yen rises as even more one-sided than before and that Tokyo would exchange information closely with other countries regarding currencies, suggesting it would stay in frequent contact with its Group of Seven partners.

We will watch markets even more closely than before to see whether there is any speculative activity. We won't rule out any measures and will take decisive action when necessary, Noda told reporters on Monday.

Noda, Prime Minister Naoto Kan and top government spokesman Yukio Edano all repeated the phrase throughout the day, a sign that it has become the new line Tokyo would use to warn markets that intervention is an imminent possibility.

Market expectations of currency intervention briefly sent the dollar to a one-and-a-half week high of 77.23 yen on Monday, off the record low of 75.95 yen hit last Friday.

But prospects of intervention failed to offset stock market worries about slowing U.S. growth, pushing Tokyo's Nikkei average <.N225> to a five-month closing low.

WARY OF ACTION

Tokyo intervened unilaterally in the currency market and eased monetary policy on August 4. But the steps have not stopped investors from seeking the yen as a safe haven against risk.

Trade Minister Banri Kaieda, who along with Noda is a contender to replace Kan when he steps down as early as the end of this month, said on Monday it would be best if Japan and the United States could jointly intervene in the currency market, according to Kyodo news agency.

Intervention is aimed at teaching (market players) that if they buy the yen too much, they will get burned, he said.

But Kaieda does not have jurisdiction over currency policy, and was likely expressing his hope than signaling that any serious negotiation with Washington has taken place.

Markets are bracing for another round of intervention but doubt whether it will be effective in sustainably weakening the yen, particularly with little chance that Tokyo can persuade its G7 counterparts to act jointly in the currency market.

I don't think Japan will intervene as long as the dollar stays around current levels above 76.50 yen. But if it falls back below 75, it may step in. The authorities are ready to act at any time and that's probably the message they are trying to send, said Naoki Iizuka, senior economist at Mizuho Securities.

Stock prices may briefly rally if Tokyo intervenes. But it would be difficult to change the market's (weak-dollar) trend.

If the government were to intervene, the BOJ is ready to support the yen-weakening effort by holding off from draining the extra yen that flows to the markets via intervention, and possibly by easing monetary policy further.

The BOJ will consider loosening policy, possibly before its next rate review in September, if yen gains push down Tokyo stock prices enough to hit business sentiment, sources familiar with the central bank's thinking have said.

Policymakers, however, are caught in a dilemma. They know the limits of trying to stem yen rises with policy action. But if they hold off on meeting words with action for too long, the effect of verbal warnings will quickly fade.

Upcoming events that may drive down the dollar, such as Federal Reserve Chairman Ben Bernanke's speech on Friday in Jackson Hole, Wyoming, and U.S. payrolls data on September 2, may also wipe out any yen-weakening effect if Tokyo acts now.

Any currency intervention and monetary easing would thus be more of a symbolic attempt to show the authorities' determination to address yen rises, as Japanese companies complain about the pain from yen gains and threaten to shift production overseas, analysts say.

Political uncertainty may also delay policies to address the potential harm from a strong yen on the economy. Ruling party lawmakers are maneuvering to select a successor to Kan, which may slow progress in coming up with steps to support growth in a third extra budget.

Japanese rating agency Rating and Investment Information (R&I) said on Monday the country's political stalemate was a worry and warned that it looks increasingly hard for Japan to maintain its top sovereign credit rating.

(Editing by Edmund Klamann and Joseph Radford)

Japan Ben Bernanke Bank of Japan