Japan tries to curb sharp rise of yen

The Japanese government is putting together a Y920bn (£7bn) stimulus package and the Bank of Japan is increasing its bank lending programme by Y10,000 trillion in an effort to curb the steep rise of the yen and support the country's fragile economic recovery.

The measures were drawn up after the yen hit a 15-year high against the dollar last week, weighing on Japanese exports and threatening an economy already struggling against 17 consecutive months of falling consumer prices.

The massive expansion will boost the Bank of Japan's commercial bank lending programme by half and adds another six months to its three-month lifespan. The move came after the bank's governor, Masaaki Shirakawa, returned a day early from the US Federal Reserve's annual symposium of central bankers in Jackson Hole, Wyoming, for an emergency meeting and came under pressure from the government to throw the bank's weight behind efforts to weaken the yen. Mr Shirakawa said yesterday that the bank was ready to take further action if necessary.

The Prime Minister, Naoto Kan, said the fiscal stimulus package, which will be outlined in detail on 10 September, would help graduates to find jobs, extend existing incentives to consumers to buy environment-friendly household appliances, and support small businesses. "The stimulus package and the BoJ's decision form two pillars in responding to the current situation," he said.

However, the measures were greeted with scepticism by the markets yesterday. Although the yen and government bond yields initially fell, both soon recovered, suggesting that investors doubt they will prove sufficient.