09/21 07:43 Yen Falls as Japan Sells Its Currency in Move to Help Exporters By John Beresford-Peirse

London, Sept. 21 (Bloomberg) -- The yen had its biggest drop in two months against the dollar as Japan sold its currency for a third time this week to prevent gains from hurting exports as the nation's economy sinks into recession.

Japanese policy makers have few options besides weakening the currency to pull the second-biggest economy out of an 11- year slump because interest rates are already close to zero and the government is constrained from spending by debt that's equal to about 130 percent of gross domestic product.

A weaker yen means ``cheaper exports and rising inflation, which they want,'' said Kevin Gibson, who manages 800 million pounds ($1.16 billion) at Edinburgh Fund Managers.

The yen fell as low as 117.48 per dollar from 115.96 yesterday, when it reached a seven-month high. It has gained 3.8 percent against the dollar since last week's terrorist attacks on the U.S., and recently traded at 116.34. Against the euro, it rose to 107.05 from 107.47.

Japan's central bank today bought dollars after the yen strengthened to 115.90. It sold the currency on Monday, at 116.65, and Wednesday at 117.10. Finance Minister Masajuro Shiokawa said today he wants to keep the yen weaker than 117 per dollar.

Effect Limited

Hinting at further yen sales, Shiokawa said the government is ready to buy dollars ``whenever needed.'' He said Japanese officials will ``have full discussions'' on the issue before markets close for a three-day weekend. Monday is a holiday.

Some investors said the interventions aren't succeeding because the bank is acting without other central banks.

The Bank of Japan is also having limited effect because Japanese companies and institutions are bringing profits home before the end of the fiscal half-year on Sept. 30, and because currencies of countries such as Japan with large current account surpluses tend to perform well in periods of uncertainty, said Francesca Fornasari, a currency strategist at Lehman Brothers.

``It's like holding a beach-ball under water, against natural forces,'' said Kirit Shah, chief markets strategist at Sanwa International.

Honda Motor Co., Japan's No. 2 automaker, said this week that each yen the dollar fall shaves off 14 billion yen ($120 million) from operating profit. The company based its earnings projections on an average dollar rate of 116 yen. Honda's shares are down almost 40 percent since the attacks in the U.S.

Foreign Sales

Trade Minister Takeo Hiranuma said an exchange rate of 115 yen to the dollar is ``as high as'' companies can stand. ``We have to take measures so exporters aren't hurt,'' he said.

Exports account for about one-tenth of Japan's economy, which is probably in recession again after shrinking 0.8 percent in the second quarter. The economy will contract this quarter, according to economists surveyed by Bloomberg News.

The euro fell to 92.02 U.S. cents from 92.63 as European stock indexes dropped on concern the attacks in the U.S. will lead to war and will slow economic growth further.

Benchmark indexes in the U.K., Germany, Italy and Switzerland fell to their lowest levels since 1997 and are on track for their worst monthly performances in 11 years or more.

``The euro is sitting on the sidelines,'' said Rob Newman, a trader at Bank of Nova Scotia. ``It's waiting for'' for the U.S. response to terrorist attacks last week in New York and at the Pentagon.

Waiting for Reprisals

President George W. Bush yesterday demanded that Afghanistan's Taliban regime turn over the administration's prime suspect, Osama bin Laden, and his allies. As he spoke, U.S. ships, planes and troops were moving toward staging areas in the Persian Gulf.

The euro has weakened about 1 percent in the past two days. Investors that ``had long speculative euro positions may be squaring those'' in case there's any U.S. military retaliation this weekend, said Adrian Schmidt, senior currency strategist at RBS Financial Markets.

Earlier, a report showed German executives were more pessimistic in August than in the previous month, the sixth decline in seven months.

The Ifo research institute's index of executive confidence in western Germany, Europe's most watched sentiment indicator, declined to 89.5 from 89.8 in July. About three quarters of the companies Ifo surveyed replied before the attacks, Ifo said yesterday. Economists had expected the index to remain unchanged.

``It's not had a great deal of impact because most of the survey took place'' before the attacks, said Shahab Jalinoos, a currency strategist at UBS Warburg.

In other trading, the Swiss franc rose to a 20-month high of 1.5683 per dollar from 1.5907 yesterday. It recently traded at 1.5714.

Japan is struggling to weaken there currency against the dollar. They must have a weaker currency otherwise there major corporations won't be able to profit from exports. There stuff will become to expensive for us BUT everybody is selling the dollar. We could pull Japan right down with us. That would be first and second largest economies in the world in a tailspin

-- Guy Daley (guydaley1@netzero.net), September 21, 2001