Yen Intervention Will Still Be Needed. By Nicholas Hastings

Politics is one thing and the currency market is another, as the new Japanese government has just found out.

This revelation should mean an end to the yen's recent sharp rally, which has taken the dollar under Y90 for the first time in over seven months.

However, currency speculators could still decide to test the resolve of the new DPJ Finance Minister Hirohisa Fujii and push the yen up towards Y80 to the dollar, a level where he will probably be forced to intervene.

If so, Fujii has brought this problem on himself.

His consumer-friendly party swept to power just two weeks ago, replacing the LDP, which has held sway over Japanese politics since the Second World War.

Within days, Fujii made the startling admission that he didn't support market intervention to manipulate the currency. He expressed concern that a cheaper yen would "lower people's living standard compared with their foreign counterparts."

The market took Fujii at his word, pushing the yen 2% higher and knocking the Nikkei Index off its perch as exporter stocks tumbled.

In to time at all, Fujii learnt two tough lessons. One, maybe the Japanese consumer isn't so important after all. And two, don't give currency markets an excuse to test your resolve.

Sure, Japanese consumers may like to keep up with their counterparts overseas but, as recent data including a 2.4% fall in Japanese consumer prices shows, the Japanese economy is still at risk from further deflation.

A new Tankan survey from the Bank of Japan this Thursday is likely only to provide more evidence that the economy remains weak.

"The theory that a rising currency will boost spending power is all well and good, but one suspects that Japanese consumers are more worried about jobs and wages than the relative cost of a new pair of Blahniks," said Mitul Kotecha, head of global strategy at Calyon Credit Agricole in London.

In other words, a cheaper yen is more important for Japanese exporters who watched their export volumes fall by 1.3% last month. This is hardly good news for an economy that is essentially driven by its export industry.

Fujii has been quick to retract his anti-intervention comments, warning that the currency is now too strong and suggesting that the ministry "might take whatever action deemed necessary for the sake of the country."

Lesson learnt, Mr Fujii.

But, some fear that this might still be too late to help the currency.

As the currency strategy team at Commerzbank noted: "It is difficult to put the genie back in the bottle once it has been unleashed."

With fiscal half-year repatriation also flowing in the direction of the yen, currency speculators could well decide that Fujii may have to put his money where his mouth is - and decide to continue pushing the yen higher to see if he really is prepared to intervene.

Early Wednesday in Europe, the dollar remained weak, falling to Y89.78 by 0645 GMT from Y90.19 late Tuesday in New York, according to EBS.

The euro was also down at Y131.28 from Y131.41 as the yen benefited from concern about the global recovery after Japan published a series of disappointing economic figures on industrial production, auto production, auto exports and housing starts.

However, the euro was still able to pushed ahead a little to $1.4624 from $1.4573.