Business Blog Posts

Japan's solo intervention to weaken the yen on Wednesday arrived sooner than many market participants had expected, making investors suspect officials in other Asian economies may keep their currencies weak and pushing up longer-term U.S. Treasury yields.

For a yen PDF, click: r.reuters.com/zuz33p

"After Japan joined the club of Asian central banks by intervening in the FX market, investors will now look to determine how successful the policy will turn out be," Mitul Kotecha, global head of foreign strategy at Credit Agricole CIB, said in a note.

"In the near term there will be wariness of further intervention to push the yen weaker, which will also keep other Asian currencies on the back foot."

Asia's currencies are a major focus among investors globally, especially with the Chinese government setting the yuan's mid-point for its trading range at a post-revaluation high for the fifth day in a row.

Beijing is under fire from Washington, where lawmakers have threatened to take action against China's currency practices. U.S. Treasury Secretary Timothy Geithner will tell policymakers later in the day that he is looking for ways to get Beijing to move faster on the yuan, his prepared remarks to Congress showed.

All eyes were on the U.S. dollar dripping lower against the yen. Japan did not appear to step in to currency markets during Asian trading hours, leaving what one trader called a "deafening silence."

JAPAN'S RESOLVE

The U.S. dollar was down 0.5 percent at 85.30 yen, not too far from Wednesday's high of around 85.75 yen. Dealers on Thursday may further test Japan's resolve to keep the yen weak, though portfolio managers with a longer time horizon could hold off on closing out of bets on yen weakness.

"Institutional investors have started to close their yen-short/dollar-long positions since mid-August, which I think has helped to accelerate the yen's rise. Intervention could make those investors think twice about closing their positions," Kimihiko Tomita, the head of forex at State Street Global Markets in Tokyo, said.

The yen was climbing the most against other currencies. The Australian dollar, for example, rose 0.9 percent to 79.74 yen.

Still, expectations that Japan is determined to make its yen selling policy effective made Japanese exporter stocks outperform most of Asia.

Japan's Nikkei share average .N225 was largely unchanged after earlier climbing to the highest since August 10. Large and liquid exporter stocks outperformed the broad market, with Toyota Motor Corp (7203.T) up 2.2 percent.

Despite the Nikkei's stand-out equity gains this week, Japan has significantly underperformed other advanced stock markets in the current quarter. U.S. and European stocks are up some 9 percent while Japan has eked out a gain of 1.3 percent.

The MSCI index of Asia Pacific stocks outside Japan slipped 0.6 percent .MIAPJ0000PUS on profit taking in the materials sector. Commodity-related stocks have been outperforming the MSCI index, climbing 20 percent since June compared with the index's returns of 16 percent.

Investors will be looking to reports on new U.S. jobless claims, producer prices and a regional manufacturing report later in the day. Recent data has suggested the U.S. economy is stuck in a soft patch but do not suggest a new recession is brewing, as some analysts had feared.

Investors took advantage of the overnight rise in the late-maturity U.S. Treasury yields and bought the bonds back. The 10-year U.S. Treasury yield slipped two basis points from late Wednesday in New York to 2.70 percent.

Japan's yen selling had weighed on long-maturity U.S. yields on Wednesday in anticipation that the purchased dollars would presumably be recycled into short-maturity Treasuries.

The spread of 10-year Treasury yields over Japanese bond yields widened to the most in almost a month, offering another reason for dealers to get behind dollar strength against the yen.

Gold was nearly unchanged at $1,267.35 an ounce after hitting a record high of $1,274.75 on Tuesday.

U.S. crude fell for a third straight day, down 0.5 percent to $75.64 a barrel, after Enbridge said U.S. regulators have agreed to a Friday restart of the company's biggest pipeline from Canada, restoring crude supplies to Midwest refiners.

(Additional reporting by Hideyuki Sano in Tokyo; Editing by Nick Macfie)

The Senate is expected to hold a series of votes in the morning on the package of lending incentives and tax breaks and could possibly give it final approval.

The House of Representatives has passed a similar bill and is expected to quickly approve the Senate's version.

With the unemployment rate stuck at 9.6 percent, voters cite jobs and the economy as their top concern and say Obama has not done enough on the issue.

Republicans are poised to rack up big gains in the November 2 elections and could win control of one or both chambers of Congress.

If the measure clears Congress, it would be a rare victory on the job-creation front for Democrats, who have seen many of their other efforts blocked by Republicans this year.

Republicans have characterized the bill as a bailout along the lines of the unpopular Wall Street bank rescue effort, and blocked action at the end of July. Returning from a monthlong break, two Republicans broke with their party on Tuesday to give Democrats the votes they need to advance the bill.

"While I'm grateful for this progress, it should not have taken this long to pass this bill," Obama said on Wednesday.

Smaller firms have complained of trouble getting access to credit after the 2007-2009 financial crisis, when many banks sharply pulled back their lending activity.

The bill, which is backed by industry groups, would create a $30 billion fund that the government would invest in independent community banks to encourage lending to small firms.

It would also exclude from taxes all capital gains on sales of small-business stock, and ease tax rules for expending

and depreciating equipment. Tax breaks in the bill total $12 billion.

Democrats estimate the measure could create 500,000 new jobs. Some 8 million jobs have been lost since the recession began in late 2007.

Republicans, meanwhile, have invoked small businesses as they oppose an Obama proposal that would raise income taxes on the wealthiest 3 percent of U.S. households, arguing that it would snare many who file business income as personal income.

(Reporting by Andy Sullivan, Editing by Vicki Allen)

The Congressional Oversight Panel said in its latest monthly report that the public "stigma" surrounding the Troubled Asset Relief Program has constrained policy choices and may make it politically impossible to take similar rescue actions in the future.

"Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high," the panel said in its September report.

"The program's unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future."

The report, issued on the second anniversary of the crisis that drove Congress to approve the $700 billion bailout effort, consulted several prominent economists to evaluate TARP's performance. They concluded that TARP provided critical support at a time when the financial system was in "freefall," but created significant moral hazard in the financial system.

"As long as huge banks can count on taxpayer-funded rescues, we should not be surprised if banks take on enormous risks, knowing they can keep the profits if the banks win and shift the losses onto the taxpayers if he banks lose," said Damon Silvers, the panel's deputy chairman, told reporters.

Panel Chairwoman Elizabeth Warren recused herself from approval of the report, Silvers said. Warren is expected to be soon named by President Barack Obama to an advisory role to set up a new consumer financial watchdog agency, Democratic sources have told Reuters.

The panel under the leadership of Warren, a Harvard Law School professor, has been critical of Treasury's handling of the bailout program, arguing that its housing rescue efforts have been ineffective and taxpayers weren't adequately protected in some bailout decisions.

The latest report also concluded that Treasury Secretary Timothy Geithner's decision to extend TARP until October 3 of this year did little other than to keep alive the government's implicit guarantee of the financial system.

A plan to extend more capital to small and community banks on easier terms met with resistance from bank executives and no new funds were added to address foreclosures or aid securitization markets.

Treasury spokesman Mark Paustenbach, responding to the report, said the need for new bailout programs has been largely negated by landmark financial reform legislation, which "have clear mechanisms for shutting down large financial institutions at no cost to the taxpayer."

Harvard University economist Kenneth Rogoff, consulted for the report, said in written remarks that the government's bailout policy must be given credit for "averting the second great depression that might have happened in its absence. It has not, however, succeeded so far in giving a measurably better trajectory for the economy than has been typical after other postwar deep financial crises."

(Editing by Kim Coghill)

The hearing is the first major gathering of attorneys involved in the sprawling spill-related litigation since hundreds of civil lawsuits were combined before a judge in New Orleans federal court last month.

The lawsuits, brought by shrimpers, injured rig workers, property owners and others, will get an initial airing at the hearing with an expected fight over the pace of the case.

The stakes are huge. Some legal consultants have estimated the total cost to BP and its co-defendants from the biggest oil spill in U.S. history to BP could run to $100 billion if maximum fines and punitive damages are assessed.

BP has taken a one-time charge of about $32 billion to reflect the estimated costs of lawsuits, claims and fines from the spill.

The lawsuits against BP, as well as Transocean Ltd (RIG.N) and Halliburton Co (HAL.N), are expected to drag on for years. The defendants are expected to argue at Thursday's hearing that most individuals and businesses who are suing do not have a right to be in court, based on the briefs they filed.

The defendants will argue that they should not turn over large volumes of potential evidence until next year after the court determines who can sue.

If the judge, Carl Barbier, opts for an accelerated schedule, it would allow plaintiffs' attorneys to quickly build their case before their clients feel pressed to settle.

For the defense, a slower pace will give time for claims to be paid from a $20 billion fund set up by BP, which is being overseen by the Obama administration's former executive pay czar, Kenneth Feinberg.

Each individual or business who accepts a final payment on their claim gives up the right to sue BP, and presumably the strongest legal cases will fall away as the payments flow.

"Defendants want to delay substantive progress for six to eight months, see what has occurred in the BP Claims Facility, and then, perhaps, commence the litigation," the plaintiffs' attorneys wrote in a court filing.

If the judge accepts the plaintiffs proposed schedule, they expect by March to have a list of cases to try. The defendants preferred to take up the issue of the "appropriateness" of test trials next year, without offering a time frame.

LOST PIZZA SALES

The hearing will attract some of the Gulf region's best-known plaintiff's firms and lawyers who have racked up billions in settlements with drug companies and tobacco firms.

Lawsuits have been filed by heavyweights of the plaintiffs' bar, including Texas attorney Mark Lanier and Elizabeth Cabraser, a California lawyer.

The cases have ranged from commercial fisherman who lost an entire season of catches to Post Corner Pizza in faraway Clearwater, Florida, which said sales were "eviscerated" by the spill. The local tourism board says the city was unaffected.

Many restaurants such as the famed Bayona in New Orleans argued they were indirectly harmed by the lack of fresh seafood from the Gulf. Feinberg will have determine who gets a payout.

"How far down the chain do you go? That's the toughest of the tough issues here," said Scott Giordano, the corporate technology counsel for Mitratech Inc, which provides legal consulting and technology.

Alleged victims have three years to submit a claim to Feinberg, and BP and its defendants said this week only those who have had a claim rejected by Feinberg's fund have a right to sue.

The more claims Feinberg settles, the fewer lawsuits that are brought, and less likely that the defendants are hit with punitive damages, which are trickier and more time-consuming to prove but would open the door to massive payouts.

"I doubt (claimants) would hold out for punitive damages. That's the ace in the hole that Feinberg has," said Ed Sherman, a law professor with Tulane University Law School in New Orleans.

James Roy, a Louisiana attorney who is co-liaison counsel for the plaintiffs, said he doubts BP will be able to cover all the claims with its Feinberg fund, but doesn't expect it to run as high as $100 billion.

"It will be expensive to litigate and time-consuming," he said. "Will it take as long as the Exxon Valdez (spill case)? No. Will it last 10 years? No. Will it be in the three- to five-year time frame? I hope so."

The case is In re Oil Spill by the Oil Rig "Deepwater Horizon" in the Gulf of Mexico April 20, 2010, U.S. District Court, Eastern District of Louisiana, No. 10-MDL-2179.

(Reporting by Tom Hals. Editing by Robert MacMillan)

Naoto Kan said he would take decisive steps if needed to stem rises in the yen, Jiji News Agency reported, a day after Japan intervened for the first time in six years, triggering a sharp fall in the yen from 15-year highs on the dollar.

Japan unleashed a wave of yen selling on Wednesday estimated at more than 2 trillion yen ($23.3 billion). The dollar has strengthened to 85.4 yen from around 83 before the intervention, which started in Tokyo and carried through to New York trading.

Analysts say Kan wants to appear proactive on tackling yen strength after winning a ruling party leadership race on Tuesday, and that the government may pressure the central bank to ease policy further to complement currency intervention.

"He (Kan) is trying to send a message of his party's solidarity. He is showing the strong intention of Japan to take decisive action through intervention," said Ayako Sera, market strategist at Sumitomo Trust & Banking.

"But he and the finance minister may find if difficult to explain Japan's stance to the international community," given that China is also under pressure to make its currency more flexible to help rectify global imbalances, she added.

FURTHER EASING?

The Bank of Japan has no plan to support the government's intervention with an immediate easing of monetary policy, but it is ready to act in early October if the economic recovery remains under threat, sources have said.

But BOJ Governor Masaaki Shirakawa said on Thursday that quantitative easing policies had a limited effect on stimulating the economy and prices.

"We hardly observe the fact that massive expansions in central bank balance sheets result in an increase in inflation in advanced economies," Shirakawa said in a speech at a conference.

Yoshimasa Maruyama, an economist at Itochu Corp, said further monetary easing by the central bank will depend on the size of currency intervention, given that they work in tandem.

"The greater the intervention, the greater the chance of further BOJ easing," he said.

A Reuters poll published on Thursday showed that Japanese manufacturing confidence worsened in September from the previous month for the first time in nearly a year as companies struggle with a strong yen and sluggish overseas growth.

The monthly poll, which has a 95 percent correlation with the BOJ's closely-watched tankan survey of business sentiment, showed the manufacturers' sentiment index fell 5 points from August to plus 17, down for the first time since October 2009.

Service-sector sentiment improved 6 points to minus 4 but has remained in negative territory since June 2008.

Compared with three months ago, however, manufacturers' mood was moderately better, pointing to continued improvement in the BOJ's next quarterly tankan, which is due out on September 29.

The pace of quarterly gains in the Reuters Tankan has nevertheless slowed somewhat from earlier this year and is seen declining further in the next three months, boding ill for the overall trend in the BOJ's key survey and potentially adding to pressure on the central bank to act.

The BOJ eased policy at an emergency meeting on August 30 and will hold its next rate review on October 4-5.

"The BOJ tankan will likely show manufacturing sentiment improving further but only slightly given that companies are growing more cautious about the outlook after the Reuters poll was taken," Maruyama said.

Sentiment is seen deteriorating further to plus 2 in manufacturing and minus 9 in the service sector in the three months to December, according to the August 27-September 13 poll of 400 big firms, of which 229 responded.

The indexes in the Reuters Tankan are derived by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure means pessimists outnumber optimists.

(Additional reporting by Kaori Kaneko, Tetsushi Kajimoto and Yoko Kubota; Writing by Tetsushi Kajimoto; Editing by Edmund Klamann and Nathan Layne)

"This was a very thorough analysis which in fact supports our view in this dispute," EU Trade Commissioner Karel De Gucht told Reuters during a visit to Argentina.

"I hope that everybody will be convinced that the right way out of this is to have negotiations," De Gucht said after a World Trade Organization panel issued its confidential report.

"The only way out of this dispute is in fact by finding a negotiated settlement," he said.

Boeing said that if reports about the decision were accurate, "then the ruling amounts to a massive rejection of the EU case and confirms that European launch aid to Airbus stands as the single largest and most flagrant illegal subsidy in the aerospace industry."

The ruling follows WTO condemnation in June of illegal European subsidies for Boeing rival Airbus, mostly in the form of European government "launch aid" loans. It is the biggest bilateral trade dispute ever before the WTO.

Two U.S. sources familiar with the case acknowledged the panel found Boeing had benefited from federal and other subsidies, but to a much lower extent than its European adversaries suggest.

They said the WTO had found subsidies worth about $5 billion, including $2 billion that already has been subject to an earlier settlement.

The $3 billion or so in new subsidies were mainly linked to payments provided to the planemaker by the American aerospace agency NASA, the U.S. sources said.

But a European source said the EU prevailed in most of the $24 billion of claims it had brought over allegations of unfair federal, state and local aid to Boeing.

A second European source, this one a government official, said whether the report found $5 billion or even $15 billion in subsidies was not the important issue.

"Our reading is that this is an absolutely seminal victory for Europe in the sense that Boeing has claimed for many years they were a stock-listed company operating according to market rules and they didn't violate the WTO, the official said.

"I think this report puts that straight by saying in equal measure that U.S. subsidies to Boeing have damaged Airbus as certain EU subsidies to Airbus have damaged Boeing," he said.

The report, issued only to EU and U.S. officials, will not be made public until possibly mid-2011. Boeing's share price closed a bit lower on Wednesday at $62.73.

NO COMPARISON, BOEING AND SUPPORTERS SAY

Boeing argued that any aid for which Washington was faulted paled in comparison with subsidies for Airbus that were denounced by the WTO in a ruling in a parallel case.

"Nothing in today's public reports on the European case against the U.S. even begins to compare to the $20 billion in illegal subsidies that the WTO found last June that Airbus/EADS has received," the company said.

The company's champions in Congress -- including Washington state Senator Patty Murray and Kansas Senator Sam Brownback -- said what they had been told about the ruling supported Boeing's statement.

"The two decisions are not in the same ballpark or even the same league. Anyone who says they are isn't telling the real story," Murray said.

But Alabama Senator Richard Shelby said the panel report meant Boeing and its allies "can no longer rationally claim" that only Airbus receives government support. "In fact, it is quite the contrary," he said.

The divergent views reflect a hot competition between Boeing and Airbus to build a fleet of U.S. Air Force refueling tankers. If Airbus wins, it plans to assemble the planes in Mobile, Alabama.

U.S. trade officials insisted they have long been prepared to sit down with the EU to negotiate a deal.

"We were interested six years ago. We were interested four years ago. We were interested two years ago. And we're still interested," said Nefeterius McPherson, a spokeswoman for the U.S. Trade Representative's office.

TRADE RULES SAID BROKEN

One European source said the WTO judges had backed EU complaints over some $17 billion in research contracts from NASA and the Pentagon, and $4 billion in tax breaks from Washington state.

The WTO judges found these payments broke WTO rules and should be withdrawn, the European source said. The figures were not cited in the report but were derived from adding the respective claims, the source added.

The dollar value of a particular subsidy can overstate the amount of damage its causes.

That said, "research and technical grants that are specific to an airplane or a company are always going to be subsidies because at the end of the day you cannot buy that investment in the commercial marketplace," said one European source familiar with the report.

The WTO dispute panel did not find that aid challenged by the EU was prohibited -- as it did in a ruling in the parallel case against Airbus subsidies brought by the United States.

If the aid had been ruled prohibited, it would have required faster action by Washington to fix it, the source said.

President Barack Obama will attend the EU-US summit in Lisbon on November 20, providing an opportunity for the two sides to discuss the dispute.

(Additional reporting by Laura MacInnis in Geneva, Doug Palmer in Washington, Juliane von Reppert-Bismarck in Brussels and Eduardo Garcia in Buenos Aires; Editing by Matthew Jones and Xavier Briand)

The confidential ruling, if confirmed, would add weight to European calls for a negotiated settlement to the transatlantic row over the aerospace industry -- the biggest bilateral trade dispute -- following WTO condemnation in June of illegal European subsidies for Boeing rival Airbus.

But in the past both sides have accused the other of putting out misinformation so early leaks must be treated with caution.

The confidential report, issued only to EU and U.S. officials, will not be made public until possibly mid-2011.

Boeing argues that any aid for which Washington is faulted pales in comparison with subsidies for Airbus that were resoundingly denounced by the WTO in a ruling in a parallel case.

Both sides have appealed various findings in that case.

TRADE RULES BROKEN

The European source said the WTO judges had backed EU complaints over some $17 billion in research contracts from the U.S. aerospace agency NASA and the Pentagon, and $4 billion in tax breaks from Washington state.

The WTO judges found these payments broke WTO rules and should be withdrawn, the source said. The figures were not cited in the report but were derived from adding the respective claims.

But the WTO dispute panel did not find that aid challenged by the EU was prohibited -- as it did in a ruling in the parallel case against Airbus subsidies brought by the United States -- which would have required faster remedies, the source said.

It also dismissed EU complaints over property tax and other measures in Kansas.

There was no immediate confirmation of the findings in the United States.

The U.S. Trade Representative's office confirmed it had received the report into what it called one of the most complex and lengthy disputes to come before the WTO, but said it could not comment as the interim report remains confidential.

European officials hope that will encourage the United States to negotiate a settlement to the quarrel over subsidies for aircraft, the world's biggest trade dispute.

The EU repeated that call on Wednesday saying the challenge was for Brussels and Washington to find a mutually acceptable approach to running the aircraft industry, and suggesting that President Barack Obama should get involved in the case.

"The EU has said all along that only negotiations at the highest political level can lead to a real solution and we hope that today's report provides momentum in that direction," EU trade spokesman John Clancy said in a statement.

Obama will attend the EU-US summit in Lisbon on November 20, providing an opportunity to discuss the dispute.

The United States opposes talks until the EU drops aid for Airbus's new A350 airliner which it says is similar to the other Airbus support already condemned by the WTO.

In a statement released earlier on Wednesday, Boeing said the June WTO ruling against the European Union had found that some of the "launch aid" Airbus received from the EU and member states had violated global trade rules.

"We look forward to hearing how the WTO ruled in today's preliminary decision on U.S. practices, none of which have the market-distorting impact of launch aid nor even approach the sheer scale of European subsidy practices," Boeing said.

(Additional reporting by Laura MacInnis in Geneva, Doug Palmer in Washington and Juliane von Reppert-Bismarck in Brussels; Editing by Matthew Jones)

Industrial production rose 0.2 percent in August, matching economists' forecasts for a sharp slowdown from July when unusually strong auto manufacturing lifted output, Federal Reserve data showed. July's gain was revised down to 0.6 percent from 1 percent.

Excluding motor vehicles and parts, total industry output increased 0.4 percent in August, compared with July's 0.3 percent advance.

Separately, the New York Fed's "Empire State" general business conditions index slipped to 4.14 in September from 7.10 in August. September's reading marked the lowest since July 2009 and was below market expectations for 8.0.

Economists often look to the Empire State report as an early gauge of national output patterns because it is one of the first data points released each month.

Beneath the disappointing headline, however, some economists saw cause for optimism in higher readings on new orders and the average workweek.

"We see this report as consistent with our view that manufacturing has downshifted to a lower pace of growth but not stagnated," Barclays Capital economist Nicholas Tenev said.

Another report from the Labor Department showed import prices increased 0.6 percent after rising by a revised 0.1 percent in July. Analysts polled by Reuters had forecast import prices rising 0.3 percent last month from a previously reported 0.2 percent gain in July.

Markets largely ignored the reports, focusing instead on developments on the foreign exchange markets, where the U.S. dollar jumped from a 15-year low against the yen on Wednesday after Japan intervened to sell the yen for the first time in six years.

Analysts were still encouraged that the New York state manufacturing index had not dropped below zero, which would have signaled a contraction in factory activity.

"The Empire manufacturing index was slightly weaker-than-expected, but did not fall below the zero line, further diminishing concerns about a double dip," said Jonathan Basile, an economist at Credit Suisse in New York.

The survey showed employment continued to improve.

Although import prices rose sharply in August, the annual increase of 4.1 percent was the smallest advance since November.

August's monthly rise reflected a 2.1 percent rise in the price of imported petroleum and petroleum products, the largest since April, after a 0.9 percent increase in July. Excluding petroleum, import prices rose 0.2 percent, reversing the prior month's 0.2 percent decline.

Prices of imported foods jumped 2.2 percent from a 0.1 percent rise in July. There were also increases in prices for industrial supplies and materials.

The Labor Department report showed export prices rebounded 0.8 percent last month after slipping 0.2 percent in July. Export prices were boosted by a 4.3 percent jump in food prices, the biggest rise in 14 months.

Analysts had expected export prices to gain 0.2 percent. Compared to August last year, export prices rose 4.1 percent.

(Reporting by Lucia Mutikani and Emily Kaiser in Washington and Wanfeng Zhou in New York; Editing by Neil Stempleman)

The solo intervention helped propel the euro, Australian dollar and sterling sharply higher against the yen though traders doubted Japan had bought anything other than dollars.

Kyodo news agency cited a senior finance minister official saying Japan had intervened during European hours and would do so again during New York hours if needed. However, analysts said Japan's authorities would have to counter significant upward pressure on the yen, particularly if speculation of more U.S. quantitative easing continued. This could further narrow the gap between U.S. and Japanese yields -- a key factor in recent dollar/yen weakness.

"Flows into the yen are very strong, and the Japanese authorities will have to offset those flows in order to prevent further yen appreciation," said Ian Stannard, currency strategist at BNP Paribas.

"A sustained upward move in dollar/yen is unlikely unless U.S. rate expectations start to rise."

At 1159 GMT (7:59 a.m. EDT), the dollar was up 2.9 percent at 85.48 yen, near a high of 85.72, according to Reuters data.

The Bank of Japan acts for the Ministry of Finance in intervention, which traders said continued in the Asian and European sessions after an initial bout at around 83 yen per dollar shortly after the dollar hit a 15-year low of 82.87 yen.

During the European session, traders reported buying of dollars in the 84.95/85.00 area and at 85.25 on trading platform EBS, before strong offers above 85.50 capped the move.

The euro was 2.7 percent higher at 110.86 yen. Earlier it briefly entered its Ichimoku Cloud, an indicator of momentum and future areas of support and resistance, at 111.01.

"I think we're now going to see persistent official buying of dollar/yen in the near-term," said Adam Cole, head of currency strategy at RBC Capital Markets.

Some stop-losses were reported at 85.75 yen, but technical analysts said the focus remained on the downside while dollar/yen held below key resistance at 86.40, which is the bottom of the Ichimoku Cloud.

DECISIVE STEPS

Sources familiar with the matter said the BOJ was ready to leave the intervention unsterilized rather than draining the funds that went into the currency market.

Japan's authorities aim to stop the yen's rise from hurting exporters and the economy. Prime Minister Naoto Kan said the intervention had achieved some effect but that foreign exchange moves were being watched with urgency.

Finance Minister Yoshihiko Noda said Japan acted alone.

Implied dollar/yen volatility was higher with the one-month

trading around 12.50 percent up from 12.3 on Tuesday but well below year-to-date highs seen in May near 18.00.

Risk-reversals, the premium required to hold a put or a call in a currency, were showing less of a bias for yen calls. The one-month 25-delta stood around 0.70 for yen calls compared with 1.50 on Tuesday

The Bank of Japan started buying the dollar at around 10:30 a.m. (0130 GMT) on Wednesday.

Traders cited market estimates that the latest intervention amounted to around 1.5 trillion yen ($17.67 billion)

"Speculators have been long of yen so there is scope for further yen selling. But there's skepticism over whether the Japanese can change the trend as fundamentals haven't altered," said Beat Siegenthaler, FX strategist at UBS.

The yen gained fresh momentum on Tuesday after Japanese Prime Minister Naoto Kan won a leadership ballot against a rival seen as more willing to intervene to weaken the currency.

The euro was down 0.1 percent versus the dollar at $1.2977.

(Additional reporting by TOKYO markets team and Neal Armstrong in London)