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There is mounting alarm in the government that a stronger yen might undermine its effort to get the economy back on track.

Basically, the dollar’s recent weakness mirrored the market’s obsession with a possible shift in Washington’s strong-dollar policy.

To the Japanese government’s consternation, increased purchases of Japanese equities by foreign investors have added to upward pressure on the yen.

Foreign investors are increasing Japan’s weighting in their global equity holdings, counting on a strong economic pickup in Japan.

A forthcoming government report is now widely expected to show that the gross domestic product rose at an annual rate of more than 8 percent in the first quarter.

In an upbeat report last month, the government declared that the economy is showing signs of bottoming out, and Finance Ministry officials have since disavowed a policy of guiding the yen lower artificially.

Apparently alerted by the yen’s strong surge, however, monetary authorities stepped in last week to keep the yen from rising further.

When on May 22 the dollar hit a 5 1/2-month low of 123.50 yen on an intraday basis, the Bank of Japan sold yen for dollars, surprising market participants. Authorities intervened again the next day.

The intervention point was higher than had been expected in the marketplace.

Earlier, there had been speculation that there would be no BOJ intervention until the dollar breached 120 yen.

The intervention came close on the heels of a warning by Finance Ministry officials against what they called speculative yen buying.

They apparently acted on Finance Minister Masajuro Shiokawa’s behest.

The government apparently fears a steep yen rise against the dollar will stifle an economic recovery fueled by a pickup in foreign demand for Japanese products and increased export earnings.

Although investors are elated at the strong rebound in Tokyo share prices, the economy still cannot live with a strong yen.

Caught in the crosscurrents of a rising stock market and a strengthening yen, Japanese monetary authorities are faced with challenges from foreign investors, who may test their will to counter speculative attacks on the yen.

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