Tokyo boost for world markets

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Economics Correspondent

Shares in Tokyo led the way in a sparkling performance yesterday, Japan's first trading day of the new year.

After the opening ceremonies, the stock market surged by nearly 4 per cent to the highest since September 1994.

The Nikkei index leapt nearly 750 points to close at 20,618, and volumes in the half-day trading session were heavy.

US markets took up the baton, briefly enjoying their third buoyant day in succession. The dollar jumped to its highest level against the yen for nearly two years. It passed the 106 level to reach its highest since March 1994.

The Dow passed its previous record to reach a high of 5,227 after the first hour of trading, before losing some of the gains. By the close in New York, the index was down 20.23 points at 5,173.84. The US Treasury market moved half a point higher during the day.

Dealers said the driving force behind buoyancy in the markets was positive sentiment about investing in the US. ''The focus is the budget talks, and an economic backdrop weak enough to favour lower interest rates,'' said Elias Bikhazi at Deutsche Morgan Grenfell in New York.

The attraction of US markets was cited as an important factor behind the dollar's recent burst of strength. Automatic trades took it higher yesterday after it passed 105.

In turn, the stronger dollar spells relief for Japanese exporters. Corporate earnings should improve dramatically if the Japanese currency remains weak. Shares of Honda and Toyota, heavily dependent on exports, did especially well.

Foreign investors were reported to be prominent in yesterday's trading in Tokyo. This was reflected in huge gains in some of the blue chip stocks such as Canon, Sony and Toshiba. Analysts said the new buoyancy of the Nikkei would give Japanese institutions the confidence to invest more abroad.

The dollar is expected to remain in the range 105-110 for the time being. ''That is the level both Japan and the US are happy about,'' said Yoshinori Matsushita, foreign exchange manager at Mitsubishi Bank. A higher level would start to hurt American exporters, whose complaints would have particular force in election year.

The White House said yesterday that President Clinton and Republican leaders in Congress were ''writing a real budget agreement''. The row has kept the Federal government partially closed since 16 December, but financial markets are counting on a seven-year deal to balance the budget within the next few weeks.