The yen's rise appears to be unstoppable, and that is starting to worry Japan's major companies.
In the past three months, the currency has gained 5.6 per cent and recently strengthened to a post-Second World War high of 75.95 against the US dollar as investors sought refuge amid market instability.
That was despite Bank of Japan (BoJ) intervention early this month to sell ¥1 trillion in an effort to curb the currency's gains. A strong yen is bad for the export-dependent country, which is struggling to reduce public debt and rebuild after the tsunami and earthquake disasters in March.
Almost two out of five major Japan companies say they will have to move even more production abroad unless the strength of the country's currency abates, according to a poll by the Nikkei Business Daily. Hirohide Yamaguchi, the deputy BoJ governor, has admitted he is worried about the soaring yen.
And Yoshihiko Noda, the finance minister, confirmed the government would take action if needed to counter speculative moves that drove the yen higher.
But in a recent interview with The Wall Street Journal, Takehiko Nakao, the vice finance minister for international affairs, said Japan did not plan to intervene often in the foreign exchange market.
One answer, according to Seiji Maehara, the foreign minister - and the front-runner in the race to become the country's next prime minister - would be to exchange the yen for foreign currency.
Buying prime assets overseas would be more effective than intervening in the foreign exchange market, he says.
The practice is akin to the carry trade, an investment strategy in which traders take advantage of low interest rates in Japan to borrow yen and reinvest higher-yielding assets overseas. However, any collapse could send the yen soaring yet again. In the aftermath of the earthquake and tsunami, Japanese investors began to bring their investments back home, which inflated the yen. The yen is seen as a haven currency, but the carry trade is another reason why it tends to gain in times of global distress - when global investors unwind risky trades that have been financed with cheaply borrowed yen.
The government is sticking to traditional weapons for now, launching a US$100 billion emergency fund to encourage exports and overseas investment. If it works, speculators may not have much longer to cash in on the yen's surge.
