Deepening Slide for Yen Spurs Worries

Japanese officials fanned speculation Tuesday that the government believes the only way out of recession is to further weaken the yen--a move that risks conflict with the nation’s major trade partners.

In Asian trading Tuesday, the yen’s value reached 130.92 per dollar, the weakest for the Japanese currency since October 1998. Early today, the yen strengthened slightly to 130.7 per dollar.

The yen has weakened dramatically in the last few weeks, since breaking through the 123-per-dollar level in late November.

A devalued yen makes Japanese exports cheaper overseas, potentially boosting sales of those exports.

But in a depressed global economy Japan’s gain would be other countries’ loss if sales of their products suffer because of greater Japanese competition.

Finance Minister Masajuro Shiokawa signaled Tuesday that he would condone a further decline in the yen, saying it would still keep the currency in line with Japan’s economic fundamentals.

“Even if the yen weakens slightly further, it would still be an appropriate assessment of Japan,” he told a news conference.

Shiokawa added that a weak yen would be beneficial for Japan by correcting a stubborn fall in prices. Japan’s consumer prices have fallen for an unprecedented two straight years. A weaker yen would drive up the cost of goods that Japan imports while lowering the cost of the country’s exports.

Shiokawa’s deputy, Haruhiko Kuroda, echoed his sentiment, saying the yen’s current weakness reflected the economy’s fundamentals, although a slide beyond this level may not be desirable.

The comments came a day after Prime Minister Junichiro Koizumi’s Cabinet approved a belt-tightening budget for the next fiscal year that analysts say is not enough to hoist the world’s second-largest economy out of recession.

With fiscal stimulus options limited by a bulging public debt--already the worst among industrial countries--and interest rates already near zero, a weaker yen would be a convenient way out as it increases Japan’s export competitiveness.

Some Japanese officials were careful to stress that the government was not intentionally trying to foster an abrupt plunge in the yen, as that could trigger complaints from other Asian nations.

China’s official People’s Daily said in a commentary Monday that the yen’s slide could set off a round of Asian currency devaluations not seen since the regional economic crisis of 1997.

Asked about such concerns among Asian neighbors, Trade Minister Takeo Hiranuma said: “If the yen weakened further, it is possible that such issues would be raised.”

“I think it is desirable that the yen does not fall further, although given current severe economic conditions the recent trend is likely to continue,” he said.

Hiranuma also cautioned that a weaker yen would discourage inward foreign investment, while Toyota Motor Corp. President Fujio Cho said his firm--Japan’s largest car exporter--was not necessarily happy with the yen’s weakness because of its effect on share prices and higher procurement costs.

During the last decade, the Japanese government has tried to spend its way out of recession through public works spending funded by bond issuance.

But Koizumi has pledged to rein in public debt--projected to rise to about 140% of gross domestic product--despite objections by economists and politicians within his own Liberal Democratic Party.

Economics Minister Heizo Takenaka said he didn’t think the government’s budget draft for fiscal 2002-2003 represented fiscal austerity.

“If you consider the decline in prices, it’s virtually unchanged. We do not think it represents austerity and is probably net neutral for the economy,” Takenaka told a news conference.

The government expects the economy to post zero growth in the next fiscal year, partly helped by a second supplementary budget for this year, which is aimed at boosting demand.

The Japanese stock market has been among the world’s weakest over the last month as the yen has slumped, reflecting investors’ suspicions about the net gain exporters might realize from the currency’s slide.

The Nikkei-225 share index was trading at 10,244 early today, down 6.4% since Nov. 27.

The Nikkei has fallen 25.7% year to date, double the decline of U.S. blue-chip indexes.