ANALYSIS-Japan one step closer to intervention as yen surges

* Sharp move in yen increases threats of FX intervention

* Yen may keep rising as risk aversion increases

By Vivianne Rodrigues and Nick Olivari

NEW YORK, July 8 (Reuters) - Japan could be one step closer to intervening in the foreign exchange market for the first time in five years as a soaring yen further jeopardizes the country's chances of pulling out of recession.

Growing unease about the global economy has prompted investors to rush out of trades that bet against the yen while favoring higher-yielding but often riskier currencies.

The move accelerated on Wednesday and spurred talk of intervention or at least jaw-boning of the exchange rate by Japanese officials, after investors bought back yen, pushing it to multi-month highs against both the dollar and euro.

If the yen strengthens to trade below 90 to the dollar, "it is more a question of 'when' than 'if'," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon, in New York. "At this stage, the pace of the move rather than the absolute, is their main concern. They want to see stability, they have mentioned it many times before."

Japanese officials have said repeatedly the country is not considering intervention in currency markets. However, given the country's reliance on exports, they may be more motivated.

Investors are also mindful that the Group of Seven industrial powers in October issued a rare inter-meeting statement singling out yen volatility, giving Japanese authorities the green light to stem its surge at that time.

The yen also jumped against the Australian and the New Zealand dollars as it quickly broke through key levels around 93.40 to the U.S. dollar to touch its highest since February.

The yen moved more than 3 percent against both the dollar and euro Wednesday in its biggest one-day moves since March and November, respectively.

Japan has a long history of trying to stem yen strength by intervening to buy dollars, but it has stayed out of the market since a 35 trillion yen ($377 billion) campaign over 15 months ended in March 2004. The Ministry of Finance has gradually moved away from heavy intervention because that last campaign had mixed results.

A summit of the Group of Eight major economies in Italy starting on Wednesday was silent on currencies but the sharp moves are unlikely to go unnoticed, analysts said.

"As the yen starts getting close to the 90 mark, we are going to see Japan stepping up the rhetoric at least," said Vassili Serebriakov, currency strategist at Wells Fargo Bank in New York. "It's inevitable."

Central banks have become more active in currency markets in recent months to prevent price volatility from threatening a nascent economic recovery.

FOLLOWING THE SWISS EXAMPLE?

The Swiss National Bank surprised the market in March by buying euros and U.S. dollars and selling the franc. It was the first time that the SNB had intervened since 1995.

The SNB denied they intervened to weaken the currency -- instead acting to stop it from rising. Swiss monetary authorities have sold the franc several times after the March announcement, with more aggressive forays in the last days of June, traders said. As a result, the Swiss franc has fallen about 4 percent versus the euro since March.

The Japanese currency has also strengthened in the past as investors unwound carry trades, trading around 88 to the dollar late last year as the global economic crisis intensified.

Momentum is now building again to hold yen as risk aversion rises.

"As risk aversion goes up, the yen is regaining some of the safe-haven characteristics it has lost," said Serebriakov. "Carry trade positions now are not as large as they were pre-crisis, but the yen will keep benefiting. And let's see what happens if we get to the 90 mark. That's probably the line in the sand." (Additional reporting by Wanfeng Zhou; Editing by James Dalgleish)