By Noriyuki Hirata
TOKYO, May 29 (Reuters) - As Japan's yen drifts back to levels that prompted official intervention a month ago, markets are sizing up Tokyo's remaining financial firepower and political will to defend its ailing currency.
Japan spent about $63 billion in what were suspected to be multiple bouts of yen-buying intervention at the end of April and early May, a small fraction of its $1 trillion war chest. But traders think that spending all of that, or even much of it, is unrealistic.
And as speculative bets against the yen creep up again, authorities will be looking to keep markets on edge.
"The more foreign reserves shrink, the more vulnerable Japan looks to speculators," said Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities. With yen-selling pressure showing no sign of easing, "the war of nerves between the authorities and the market looks set to continue."
Yen-buying intervention requires selling foreign assets, of which Japan held about $1 trillion at the end of April. After subtracting the roughly 10 trillion yen ($62.78 billion) deployed in the April and May actions, based on calculations of Bank of Japan money market data, that leaves about 150 trillion yen, or enough for "around 30 rounds" of intervention, according to Goldman Sachs economist Yuriko Tanaka.
'CRUCIAL' UNDERSTANDING
But exhausting all of Japan's foreign assets wouldn't be feasible, particularly as it would negatively impact the value of U.S. Treasuries at a time when cooperation from the United States is critical. The U.S. Treasury conducted so-called "rate checks" that helped nudge the dollar-yen rate down in January.
"U.S. understanding is crucial" to sustaining the impact of any intervention, said Takeshi Ueno, a senior economist at NLI Research Institute. If Washington were to push back on such activity, it "could invite speculative yen selling."
FREE-FLOAT RULES
Another potential check on intervention is an International Monetary Fund standard whereby a country that steps into markets too often can risk losing its "free-floating" exchange rate status. But chief currency diplomat Atsushi Mimura has said the IMF rules served as no constraint on how many times the government can intervene.
"The thinking is that curbing excessive volatility takes priority," said Akira Moroga, the chief market strategist at Aozora Bank. Even if Japan were to lose its free-floating currency classification, "I don't think they care at all," he added.
The yen slid to 159.65 on Thursday, the weakest since April 30 when Japan is suspected to have made its first intervention in almost two years. The Ministry of Finance is scheduled to announce at 1000 GMT on Friday the total amount spent on foreign exchange intervention since April 28.
Japanese Finance Minister Satsuki Katayama on Friday again declined to comment on whether her agency had intervened, repeating that officials were ready to take "decisive action."
CAUTIOUS BOJ
The yen has been battered by the three-month-long Middle East crisis, with soaring energy prices delivering a terms of trade shock to Japan, which imports almost all its oil. That exacerbated an already weakening trend amid the BOJ's cautious approach to raising interest rates and expectations of expanded fiscal stimulus under Prime Minister Sanae Takaichi.
Whereas previous Japanese administrations have focused on the speed of change in deciding whether to intervene, the current government appears more centred on defending the 160 per dollar line. Rather than fearing intervention, some market participants are now positioning for it.
A dealer at a domestic bank said buy orders for dollars are clustering in the 155-157 yen per dollar zone, reflecting real dollar demand among importers as well as speculative positions. On the top side, market expectation is that the next intervention will come before the 162 level.
"The government will want to defend that level at all costs," said a dealer at a domestic bank.
($1 = 159.2800 yen)
(Reporting by Noriyuki Hirata and Kevin Buckland, writing by Rocky Swift; Editing by Sam Holmes)
