Japan's yen at two-year low

Japan's financial difficulties weigh heavily on Prime Minister Mori

The Japanese yen has fallen to its lowest point against the dollar since October 1998.

The currency has been weakening since September last year as the economy struggles to find a way out of recession.

The economy has slowed down since last year and is marking time at the moment

Masaru Hayami
Bank of Japan

But Friday's sharper fall was fuelled by the revelation that the US government may favour a policy of allowing the yen to weaken.

There are now 124.85 yen to a dollar, compared with 106 yen to a dollar last September.

The euro also hit fresh lows after the European Central Bank voted not to change interest rates in the 12 eurozone nations on Thursday.

The euro slipped to a near three-month low against the dollar, but the movement was only slight, dropping from 88.08 US cents to 87.98 US cents.

Deliberate slip?

The yen's fall was triggered by comments from Economics Minister Taro Aso that the US government had discussed a policy of allowing a weak yen earlier this month.

"The Aso comments are the main thing, as the markets have taken this to imply that the US would be happy with a weaker yen," said Kamal Sharma, currency strategist at Commerzbank in London.

Commerzbank

The markets have taken this to imply that the US would be happy with a weaker yen

Kamal Sharma

Some observers interpreted Mr Aso's comments as a deliberate attempt to drive the yen weaker.

Japanese economic policy favours a weak yen as this boosts exports, one of Japan's only lifelines to lift itself out of an eleven year recession.

The news came on the same day as comments from the Bank of Japan governor Masaru Hayami that the economy has slowed and is currently stagnated.

"We determine that the economy has slowed down since last year and is marking time at the moment, following the rapid deceleration of the US economy," said Mr. Hayami.

Previously, the government and the Bank were talking up the economy which looked like it was set to stage a recovery.

Negative influence

The US has not confirmed that it favours a weak yen policy.

On the surface, a weak yen is not a favourable policy for the US since it undermines the US' own exports, by making Japanese good more competitive.

But the US has repeatedly stressed the importance of a Japanese economic recovery, and a weak yen could be one way of boosting Japan's recovery.

Its fear may be that the Japanese recession could worsen the US slowdown, increasing the risk of the global economy heading into recession.