Japanese Finance Minister Hirohisa Fujii said currency intervention might be an option if exchange rates make irregular moves, in an apparent effort to dampen the impact of his previous comments that he favored a strong yen.
The yen hit an eight-month high of 88.22 to the dollar on Monday in the wake of repeated comments from Fujii that he wanted to avoid intervention and that a strong yen was good for Japanese domestic demand.
The Japanese currency has since pulled back to near 90.00 to the dollar, giving up all of Monday's gains, as Fujii backpedalled.
"Perhaps Fujii didn't realize how much the market would move on his comments after he became finance minister. But now he realizes that this isn't such a good thing," said Tokichi Ito, deputy general manager of the foreign exchange team at Trust & Custody Services Bank in Tokyo.
"I doubt Fujii has abandoned his view that a strong yen is good for domestic demand and this view is shared by the government. But the yen buying in reaction to the government's stance has likely run its course."
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A strong yen has been generally viewed as negative for Japan's export-reliant economy.
It also puts downward pressure on prices in a country where deflation is already at record levels, keeping the Bank of Japan from raising interest rates from near zero any time soon.
Fujii reiterated on Tuesday that global competition to devalue currencies was wrong, but that this didn't mean Tokyo would leave excessive yen rises unattended.
"If moves are irregular, there is a possibility we might take whatever action deemed necessary for the sake of the country," Fujii told a news conference after a cabinet meeting.
He said that his message had been consistent but that it was being misinterpreted by markets.
"I never said a word about leaving a strong yen as it is. I'm saying it's wrong, as history shows, for countries to continuously take policies aimed at lowering the value of their currencies," Fujii said.
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Analysts were unconvinced, however, saying market forces had led Fujii, picked as finance minister after voters swept the Democratic Party to power at the end of August, to beat a retreat from his previous comments.
"Fujii appears to have been jolted by the yen's rapid appreciation and is worried that the strong yen would throw cold water on the economic recovery led by exports. But it is unlikely the government actually will intervene in the market," said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute.
The yen strengthened steadily from about 93.00 to the dollar at the start of September as Fujii said many times that he didn't see the need to weaken the Japanese unit for the sake of the country's exporters and that a strong currency also had benefits.
The currency finally hit 88.22 to the dollar on Monday according to Reuters data, the highest level since January, before snapping back towards 90.00.
The dollar climbed back above 90.00 yen briefly on Tuesday, reflecting Fujii's repeated warnings that currency moves were getting too one-sided towards yen rises.
"Until yesterday, he seemed to cheer the strong yen, but now he can't stand it," said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd in Hong Kong.
"It puts a question mark on the stability of his policies and how well they are thought out for the long term. It might be better to support exports in the short term and allow the currency to strengthen later once domestic demand picks up more."
In the past, Japan intervened to weaken the yen to help its exporters stay competitive.
But Tokyo has not intervened in the currency market since March 2004, after a 15-month-long, 35 trillion yen ($390.4 billion) selling spree aimed at preventing the yen's strength from snuffing out an economic recovery.
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