• Export-led Japanese economy being damaged by rise
• Japan is ‘standing on the edge of a cliff’ says Canon

Japan’s finance minister admitted today that the soaring yen risks damaging the country’s export-led economy, sparking speculation that the government is preparing to intervene in the currency markets for the first time in more than five years.

Hirohisa Fujii’s comments came after the dollar slumped to below ¥85 – its lowest level for 14 years – before rallying to the low-¥86 range.

Fujii said the yen’s relentless rise was “one-sided” and “harmful” to the economy.

“There is no doubt that the market has moved too far in one direction,” he said. “Moves right now are extreme, and it would be possible to take appropriate measures.”

Fujii did not indicate an immediate return to intervention in the markets for the first time since March 2004. But he said he would support a G7 joint statement on currencies to take the momentum out of the yen’s recent rally. “I would respond flexibly to a joint statement on currencies,” he said.

His remarks did little to reassure business leaders, who warned that the yen’s rise would further damage exporters, just as they are emerging from the gloom of the global recession.

Canon chief executive Fujio Mitarai said Japan was “standing on the edge of a cliff” and was in need of “urgent steps” to prevent catastrophe.

“In the midst of deflation, such a sharp rise in the yen is a very serious problem and could drag down the economy,” said Mitarai, who also heads Nippon Keidanren, Japan’s most powerful business lobby. “I certainly hope the government responds with emergency steps.”

Toyota and Sony are among the major exporters that risk falling short of their forecasts for the full year because a strong yen erodes their earnings overseas.

Exporters had based their earnings estimates on a yen-dollar exchange rate of ¥90-95, but could be forced to revise them sharply downwards with no end in sight to the yen’s inexorable rise.

Another setback to recent improvements in Japan’s export performance raises the prospect of the world’s second biggest economy slipping back into recession, with analysts warning that the corporate sector is near “breaking point”.

But Naoto Kan, the deputy prime minister, said: “I have not heard of intervention at this point but in the future there will be various options and if necessary I’ll talk to ministers involved.”

Some analysts did not expect intervention while the dollar remains above the ¥80 mark.

“I don’t think there’s any chance of joint intervention above ¥80,” said Gerrard Katz, head of foreign exchange trading at Standard Chartered in Hong Kong.

“I found it very interesting that the Japanese finance minister said a strong yen could harm Japan’s economy, because that’s what it really is all about. But the way the market is going, we’re not close to intervention levels.”

The dollar’s recent fall has proceeded amid signs that the US will maintain low interest rates and Japan will not intervene to weaken the yen. The US currency has been offloaded amid a loss of confidence among investors spooked by the Dubai debt scare.

The last time it intervened, Japan’s finance ministry sold ¥35 trillion over 15 months in an effort to keep the yen weak and cushion the blow for the country’s exporters.

Pressure for a return to intervention will mount as long as prices begin to fall at home, analysts said. Last week officials conceded that deflation had returned to Japan’s economy for the first time in three years.