Switzerland's bold move to set a minimum exchange rate against the euro for its soaring franc may force Tokyo's hand and prompt it to intervene to weaken the yen if the Swiss action diverts more inflows seeking a haven in the Japanese currency.
The Swiss move also slightly shortens the odds that the Bank of Japan will announce a further increase in its asset buying programme when it wraps up its regular policy meeting today, especially if the yen rises sharply.
Fears that the world economy may tip back into recession have spurred investors around the world to dump riskier assets such as stocks and seek the relative safety of gold and the Swiss and Japanese currencies.
"The Swiss franc has been the number one safe-haven currency, followed by yen. So it is possible that the yen will attract more buying as investors flee risks, although the initial reaction was dollar's spike versus the yen," said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.
"As SNB showed determination to do whatever it can to stop the Swiss franc's appreciation and the Fed is due to mull additional easing this month, the yen could be pushed higher near term," he said. In the initial response to the Swiss National Bank's announcement that it would set a minimum euro exchange rate at 1.20 francs and defend that level by buying unlimited amounts of foreign currencies, the franc and yen fell.
The franc plunged against the euro and dollar, while the yen slipped against the dollar as far as about 77.60 from about 76.80 before the news.
But analysts said that could be simply an automated response of trading systems and prove only a brief reprieve for Japan if the Swiss move succeeds in deflecting some of the inflows seeking a haven.
The Bank of Japan has been holding a regular meeting yesterday and today and is expected to keep its policy unchanged, saving its limited policy options for later. That may remain the case if policymakers feel the need for more time to examine the implications of the Swiss decision.
But the yen is a wild card. A sudden rise past its record highs and a sharp stock market sell-off are considered a possible trigger for further monetary easing.
Even if the yen held back for the time being, the Swiss action puts the Bank of Japan in a tight spot.
"This is a headache for the BOJ too. It might choose to pre-empt any further rises in the yen by easing policy tomorrow, or decide to wait and act in tandem with the government when it intervenes in the market," said Koichi Haji, the chief economist at NLI Research Institute in Tokyo.