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Friday, 17 August, 2001, 11:26 GMT 12:26 UK
Japan warns on stronger yen
Yen-denominated banknotes
If the yen rises much further, the economy could suffer
Key Japanese policymakers have abandoned their traditional August holiday to warn that the sharp surge in the value of the yen is out of step with the already-weakened economy.

Haruhiko Kuroda, the vice finance minister for international affairs, returned to Tokyo to alert markets that the recent rise might spark a response from the Finance Ministy.

Recent foreign exchange movements have not been normal. They do not reflect economic fundamentals... The ministry will take appropriate action as needed

Haruhiko Kuroda, Japanese vice finance minister for international affairs
"Recent forex [foreign exchange market] movements have not been normal. They do not reflect economic fundamentals," Mr Kuroda, the country's top international finance official, said.

"I hope they return to normal soon... The ministry will take appropriate action as needed."

In response, the pressure eased slightly, with the yen falling back to 120.45 to the US dollar by 1115 GMT.

In recent days, the yen has touched two-month highs, for brief periods breaking through the key marker of 120 yen to the dollar.

The rise in the yen has little to do with the Japanese economy. Currency traders are backing away, for now at least, from the dollar as the US economy continues to underperform, and the yen and the euro are responding to its weakness.

Recovery at risk

Further strengthening of the yen could imperil any chance of a turnaround in Japan, which has been mired in bad debt-fuelled deflation for a decade.

The consumer price index has dropped for 21 straight months, encouraging people to save rather than spend.

Japan narrowly escaped falling officially into recession in the first half of this year after government gross domestic product (GDP) estimates for the first three months of 2001 were revised upwards on 16 August.

The revised figure showed growth of 0.1%, against a previous estimate of a 0.2% decline.

The quarter to December registered a 0.6% rise in GDP.

O-bon over early

The urgency is reflected by the fact that the August O-bon holiday is usually near-universally respected, with the month by far the quietest of the year in official terms.

The intervention follows the surprise decision earlier this week to inject an extra 1,000bn yen ($8.3bn, 5.8bn) into the economy and increase the monthly purchase of bonds by 50% to 600bn yen.

With interest rates in Japan already at zero, the kind of rate cuts used to stimulate the economy in the US and the UK are off the cards.

Minutes of the Bank of Japan Monetary Policy Board meeting in June showed its members were far from unanimous about the policy.

But the minutes said agreement was reached that further downside risks to the economy meant additional measures would be necessary.

Analysts, though, felt the move showed weakness at the Bank.

"It was obvious the Bank bowed to political pressure," said Societe Generale in a research note, saying that an inflation target would be a more effective way of encouraging growth.

See also:

15 Aug 01 | Business
Dollar slips on IMF warning
14 Aug 01 | Business
Japan loosens monetary policy
16 Aug 01 | Business
Weak dollar hits firms
16 Aug 01 | Business
Japan escapes recession
15 Aug 01 | Business
Japanese outlook poor
09 Aug 01 | Business
Japan's budget tussle hots up
31 Jul 01 | Business
Japan's jobless at record high
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