Japan has sold the yen in the market for the first time in six years, trying to stop the currency’s relentless climb from hurting exporters and threatening a fragile economic recovery.

Fresh after a victory in party leadership contest, Japan’s Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits.

Estimates vary on how much Japan has spent so far in its first intervention in the foreign exchange market since spending 35 trillion yen in 2003-2004. Dealers talk about 300-500 billion yen ($3.61-6.02bn) though some reports put it closer to 100 billion yen.

The US dollar extended its gains against the yen after an official at Japan’s Ministry of Finance said intervention was not finished, climbing more than two percent on the day above 85 yen and nearly two yen above a 15-year low.

The action pleased its target audience: major Japanese exporters.

“We applaud the move by the government and the Bank of Japan to correct the yen’s strength.” Japan’s number two automaker Honda Motor Company said in a statement. Honda has pencilled in the yen at 87 to the dollar in its financial estimates for the 2010/2011 business year.

The Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said, indicating coordinated efforts with the government to support the economy.

The central bank may follow up with additional steps, such as buying more government debt, economists said.

Analysts doubt other countries would help Japan tamp down the yen since they also need weaker currencies to boost exports and growth. Intense pressure from Washington on China to let its currency strengthen also makes any attempts by major economies to weaken their currencies particularly sensitive.

Sympathy
Japan’s Finance Minister Yoshihiko Noda indicated that Tokyo acted alone, but said he was in contact with overseas authorities and analysts said Japan would probably be spared international criticism.

“Japan will be seen as a special case. Obviously its economy has been in significant trouble for a while, stocks have been depressed for some time, export performance relative to the Asian peer group has been very weak,” Simon Flint, global head of foreign exchange research with Nomura in Singapore, said.

“To some degree there will be some sympathy in the rest of the world for Japan’s predicament.”

US officials at the Federal Reserve and the Treasury declined to comment immediately about Tokyo’s action.

Analysts doubted whether Kan’s government was ready for another protracted battle similar to the 15-month yen selling spree earlier this decade given lingering questions about the effectiveness of the last campaign.

“The amount of intervention isn’t likely to be as much as Japan was spending the last time it intervened, so it won’t be enough to stop dollar/yen from falling. It is also unlikely that other countries will cooperate,” said Junya Tanase, currency strategist at JP Morgan in Tokyo.

Noda would not say whether the authorities were buying dollars, but two traders said the Bank of Japan appeared to have bought dollars around 83 yen at the start of the action.

The Bank of Japan acts on behalf of the Ministry of Finance in currency intervention.

“We will take decisive steps if necessary, including intervention, while continuing to closely watch currency market moves from now on,” Noda told reporters at a hastily arranged news conference.

Will the yen stop rising?
Kan’s government has been trying to talk down the yen as it kept moving away from the 90 yen per dollar level most exporters had assumed in their financial plans. Until September 15, however, it had stopped short of intervening, apparently worried that acting without Group of Seven partners would not achieve much.

Kan has been re-elected ruling party leader, decisively fending off a challenge from powerbroker Ichiro Ozawa, an outspoken advocate of intervention.

“There were views in the market that Kan was more tolerant of a higher yen and the yen rose after he won the ruling party leadership vote,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

“The government probably wanted to stamp out those views. But the question is: Will the yen stop rising from here? It’s not clear.”

The yen had surged to its highest against the dollar since 1995, as low US interest rates have made the dollar cheap to borrow and swap for higher-yielding assets and as talk has resurfaced that the Fed might loosen its policy further.

The Japanese currency’s rise has brought it closer and closer to its record peak of 79.75 per dollar set in 1995 and has weighed on the Tokyo stock market’s Nikkei average, which climbed 1.8 percent on the day as news of the intervention spread.