"Policy-makers recognise that the rise of the yen partially reflects...a shift in relative fundamentals (between the United States and Japan)," said Peter Morgan, senior economist at HSBC Securities Japan.

"Therefore they will probably seek to slow the yen's rise rather than reversing the overall trend."

The dollar slipped to a seven-month low of 109.04 yen on Tuesday and currency dealers have set their next target at 108.21 yen, which if breached would take the dollar to three-year lows.

Japanese officials have repeatedly expressed concern that a strengthening of the yen, which eats away exporters' profits and fuels deflationary pressures, could choke off the country's nascent economic recovery if it proceeds too quickly.

But the Bank of Japan (BoJ), which acts as theministry of finance's agent in currency intervention, has not been detected in the markets since July 21, when the dollar was trading around 118 yen.

Data from the central bank showed the ministry paid a relatively modest 27 billion yen to the private sector through its special foreign exchange account in August, indicating that no significant currency market intervention was likely.

In June and July, by contrast, the BoJ spent an estimated $37.76 billion to defend the sagging US currency against the yen.

One government monetary source recently acknowledged Japan's waning interest in trying to fight market trends.

"There is no guarantee that currency intervention would reverse current capital flows," the source said.

The yen's recent appreciation has been largely attributed to a flood of foreign capital into Japanese assets, especially stocks, fed by expectations of an economic recovery.

Overseas investors bought a net 4.6819 trillion yen ($42.95 billion) worth of Japanese stocks in the first halfof this year, up sharply from 324.5 billion yen in the preceding half year.

Japanese finance minister Kiichi Miyazawa was quoted in a newspaper interview on Wednesday that it was inevitable Japan's economic recovery would be gradually reflected in the markets.

Another government monetary source added that the currency markets currently appeared to be moving in an orderly fashion.

"There are few signs that momentum in the dollar/yen rate is overheating," he said, although he added that the government remained poised to act if the market overshoots.

Many currency dealers believe concerted intervention by the US Federal Reserve and Japanese authorities would be the only effective means to halt the yen's rise.

"If the Fed stepped in...it would signal a floor (for the dollar)," a US bank dealer said.

But a Japanese government source said the US would be cautious about moves to prop up the dollar, which could be interpreted as an admission of vulnerability in the US economy.

When the dollar fell to108.21 yen in January, Japanese monetary authorities actively purchased dollars below 110 yen, spending an estimated $6.74 billion.

"What was different is that in January, the stronger yen was having an adverse impact on the economy and the Nikkei (stock average)," a dealer at a major Japanese bank said.

But since January, when the Nikkei was languishing around 13,400 points, foreign investors have caught a whiff of emerging economic strength and helped push the stock barometer above 18,000 over the summer.

On Wednesday the Nikkei closed at 17,802.48.

Some speculate that Japanese authorities will only step in if Tokyo share prices get hurt by the appreciating yen.