By Leika Kihara and Takaya Yamaguchi
TOKYO, March 31 (Reuters) - Japan on Tuesday labelled recent yen falls as speculative for the first time since the Middle East war began, shifting its focus back to currency short-sellers as policymakers braced for a triple market sell-off driven by fresh inflationary concerns.
While data showed core inflation in Japan's capital slowed in March, analysts expect surging oil prices from the Iran war and higher import costs from the weak yen to pile pressure on the Bank
of Japan to raise interest rates as soon as April.
As the yen lingered near the key 160-per-dollar mark, Finance Minister Satsuki Katayama on Tuesday repeated Tokyo's readiness to respond "on all fronts" against volatile moves.
"We're seeing speculative moves heightening in the currency market," as well as in the oil futures market, Katayama told parliament. It was the first time she explicitly mentioned yen moves as speculative since the one-month-old Middle East conflict triggered renewed declines in the currency.
The remark compared with those until Monday that speculative traders in the oil futures markets could be affecting yen moves.
After briefly rising after Katayama's remarks, the yen stood around 159.93 per dollar on Tuesday, remaining a whisker away from the 160 level seen as authorities' line in the sand for intervention.
FOCUS ON FUNDAMENTALS
Japanese authorities have justified past yen interventions by describing the currency's moves as speculative and too rapid, pointing to G7 and G20 agreements that disorderly, excessive FX moves that deviate from fundamentals were harmful to growth.
Tsuyoshi Ueno, an economist at NLI Research Institute, cast doubt on whether recent yen falls were out of sync with fundamentals, as the declines were driven largely by investor demand for the safe-haven dollar.
"It's part of escalated verbal intervention," he said of Katayama's latest comments. "If the yen slides below 162 fairly quickly, 165 would be the next threshold. That's when we could see large fluctuations and prompt Japan to intervene," he said.
DOUBLE PUNCH
Markets have been rattled this month after the Iran war effectively shut the Strait of Hormuz, a chokepoint for about a fifth of global oil and gas flows, driving up crude oil prices and demand for the safe-haven dollar.
Soaring oil prices from the Middle East conflict add to inflationary pressures from the weak yen, which has been a political headache for policymakers by pushing up import costs.
Concern over the fallout from the war hit Japanese stocks with the Nikkei average on course to fall more than 11% in March. Risk of too-high inflation also led investors to sell Japanese government bonds with the benchmark 10-year yield rising on Monday to levels unseen since 1999.
Economy minister Minoru Kiuchi told reporters on Tuesday the government was closely watching not just the currency but also the bond market for any "excessive moves" in yields.
The spectre of a triple selling in Japanese assets complicates the Bank of Japan's decision on whether to hike rates soon to combat inflationary pressure, or tread cautiously to avoid hurting a fragile economy.
Annual core inflation in Tokyo slowed to a nearly two-year low in March and stayed below the central bank's target for a second straight month, data showed on Tuesday, as the effect of fuel subsidies offset rising raw material costs from a weak yen.
But analysts expect the slowdown to be temporary as the Iran war and a persistently weak yen heighten inflationary pressure, a risk BOJ policymakers debated in earnest at their March meeting.
Given the yen's renewed slide and hawkish communication from the BOJ, markets are pricing in roughly a 70% chance of a rate hike at the bank's next policy meeting on April 27-28.
"Given the double punch from the weak yen and oil spike, the risk of an inflation overshoot is heightening," said Mari Iwashita, executive rates strategist at Nomura Securities.
"Unlike in the past, companies are more actively passing on costs. Japan has become more prone to second-round effects than during the 2022 Ukraine war."
(Reporting by Leika Kihara and Takaya Yamaguchi; additional reporting by Kentaro Sugiyama, Yoshifumi Takemoto and Makiko Yamazaki; Editing by Sam Holmes)
