Rising panic in Tokyo over the surge of the yen has plunged the Government into chaos and intensified speculation that the authorities will embark on “pointless” intervention in markets to drive the currency lower.

The worsening political turmoil comes as the yen today leapt to a 13-year high against the US dollar: government insiders told Times Online that the Ministry of Finance was in the grip of a decision-making crisis and that its next move was now “virtually impossible to guess”.

The dollar sell-off came in response to this week's US Federal Reserve’s decision to cut interest rates close to zero — a move that echoes strongly in Japan where the unorthodox zero interest rate policy came to symbolise government failure in the face of prolonged economic slump.

Meanwhile, equity markets traded higher on expectations that the Bank of Japan will cut target rates from their level of 0.3 per cent to effectively zero in a move that most economists believe would achieve nothing in terms of stimulating the economy and leave the central bank without any effective weapons left if Japan tumbles back into deflation.

The Japanese Government’s long history of currency interventions has persuaded investors that it is poised to do so again. On Thursday the yen soared through the Y87 level against the dollar, providing more pain to the country’s big exporters and crossing a supposed “line in the sand”, which many had believed would automatically trigger intervention by the Government.

Those expectations were raised further today when Takeo Kawamura, the Chief Cabinet Secretary and top government spokesman, hinted strongly that a bout of yen-weakening efforts might be imminent.

“We have stepped into the foreign exchange market before,” he said.

"We will take appropriate measures, including such an option.”

The comments came less than a week after Shoichi Nakagawa, the Finance Minister, ruled out the possibility of currency intervention, arguing that the strategy was “not at all in my mind”.

Naomi Fink, a strategist at the Bank of Tokyo Mitsubishi, said that intervention was unlikely because of stark differences between the current situation and previous occasions where the Japanese authorities have stepped into markets to weaken the yen.

The last time Japan intervened with dollar-buying efforts in 2004, she said, Americans went out and bought Japanese cars and widescreen televisions.

“We know that isn’t going to happen this time and the Japanese know that it would be pointless to attempt the same sort of intervention,” she said.

But she added that amid the continuing deadlock within Japanese politics — a bottleneck that has prevented the passing of the 2008 budget — currency intervention was not completely out of the question.

“We know that Japan has taken pointless policy measures before,” she said.

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