Japan's shares and yen strengthen

The yen was at its strongest since 5 May

Japanese share prices surged upwards on Monday, and the yen hit a six-week high against the US dollar.

Traders said optimism about Japan's economic growth was fuelling demand for stocks among foreign investors, who were therefore buying yen.

The yen gained too from growing expectations that Japanese interest rates may rise soon.

Tokyo's Nikkei index jumped 2.2%, then closed up 1.9% at 11,600 points; one dollar was buying 108.30 yen.

The dollar was also sapped by a higher-than-expected US trade deficit for the first quarter of 2004.

Trade and interest rates

The US current account trade deficit came in at $144.9bn (£78.8bn) for the first quarter, beating a consensus forecast of $141bn, US Commerce Department data released on Friday showed. The current account is the broadest measure of the trade deficit.

By contrast, economists are expecting Japan's trade surplus to have expanded in May when figures are released later this week.

Although economists anticipate the US central bank will deliver a rise in interest rates on 30 June, traders said currency markets have largely factored this in after months of rumour and expectation.

"Expectations for strong US growth have become old news and the outlook for Japan's solid economic recovery now looks fresher," said UFJ Bank currency trader Yukihiro Shimoyamada.

"There is a consensus for US rates to rise, but Japan is still in the middle of discussing about when and whether to raise rates, putting a slight bias on yen buying," he said.

Shares in Japan's big exporters rose, with car maker Toyota and Honda gaining, along with consumer electronics firms like Canon.

Retailers such as Aeon and Isetan also rose, reflecting confidence in domestic consumer demand.

"I think yen-buying related to the purchase of Japanese equities was the main thing this morning," said Kota Kimura, a currency dealer at Shinkin Central Bank.