By Satomi Noguchi
TOKYO, Dec 4 (Reuters) - The yen has retreated from a 14-year high against the dollar and has weakened against other currencies since the Bank of Japan offered more short-term funds this week to try to lower money market rates and the yen.
Japan has not intervened in currency markets since 2004 but politicians are worried about its rise and Bank of Japan Governor Masaaki Shirakawa said on Tuesday the policies were a response to the yen's rally.
The currency hit 84.82 per dollar last week, its strongest level since 1995. Since then it has fallen nearly 4 percent to about 88 per dollar and more than 4 percent against the euro.
IS THE YEN EXPECTED TO GAIN AGAIN OR FALL FURTHER?
Traders say the dollar may rebound as high as 90 yen in the near term as speculators cover short positions stretched recently to the highest levels this year.
Some hedge funds are said to be resuming yen carry trades, by borrowing cheap yen to buy higher yielding assets, after the BOJ's decision to pump more funds into the banking system, lowering short-term interbank rates.
The 3-month yen Libor rate has fallen since the BOJ's announcement, which analysts say may have aimed to bring yen borrowing costs down to near or below dollar ones to stem the yen's rise.
The 3-month rate rose above the equivalent dollar rate in August. It is still higher but the differential has narrowed.
A Reuters poll this week showed analysts expect the yen to lose ground to the dollar next year, forecasting it at 92 per dollar in six months and 98 in a year.
But traders say the greenback is likely to need more factors to gain decisively above 90 yen. These include a peak in the U.S. jobless rate and a signal from the Federal Reserve that it is preparing to exit from its super-low rate policy -- which many believe will not happen until the second half of 2010 or later.
Many still expect the dollar to test its record low of 79.75 yen struck in 1995 and even go below that. Some even say it could fall as far as 70 yen in 2010.
Because global powers are pushing for a correction of trade imbalances deemed to have added to the financial crisis, Japan is expected to share in the pain of a dollar depreciation which is already pinching European and other countries.
WOULD JAPAN INTERVENE IF THE YEN DOES HEAD HIGHER?
First off, dealers expect government officials would express concern about the rise but limit themselves to warning that they are watching moves closely.
Japanese authorities tried to ease monetary conditions when the yen rose beyond 85 per dollar and analysts say the central bank could do more, such as buying back more Japanese government bonds, to try to boost yen supply.
But they believe there is little the government can do to stop the yen from gaining if the appreciation stems from dollar weakness due to prospects of low U.S. interest rates.
If the dollar were to fall to 80 yen, that would raise the risk of intervention and the market would likely turn cautious at that level. But it would also depend how quickly the yen rose.
Some say appreciation increases the likelihood Japan will approach other G7 nations to issue a joint statement to cool the rally, as they did in October 2008, if the yen rises against other currencies as well and damages Tokyo share prices.
They think Japan could seek approval to act unilaterally. Finance Minister Hirohisa Fujii last week raised the prospect of a Group of Seven statement to cool its rally.
Rintaro Tamaki, Japan's top bureaucrat in charge of currencies, was in Washington this week for a seminar, sparking speculation that he discussed currencies with U.S. officials.
So far though, many believe the yen's rise has not been disorderly enough to draw a response from the United States or Europe.
WOULD THEY CHECK RATES AGAIN TO TRY TO DETER BUYERS?
Dealers believe it would be dangerous for the authorities to try this again. Market sources said on Nov. 27, when the dollar spiralled to the 14-year low, the BOJ called banks to ask dollar/yen rates, a rare tactic central banks use to make the market feel their presence.
It helped the dollar recover that time but analysts and traders say if rate-checking is not followed up by actual intervention, it risks exacerbating yen strength. Investors holding yen short positions would buy it back smartly once they concluded there was in fact no intention to intervene.
In Japan, the BOJ acts on behalf of the Ministry of Finance when it comes to FX intervention. The market will find out if it actually bought the dollar versus the yen on Nov. 27 when the MOF releases intervention data on December 30. (Editing by Charlotte Cooper) ((satomi.noguchi@thomsonreuters.com; +81-3-6441-1875; Reuters Messaging; satomi.noguchi.reuters.com@reuters.net))