Fears of a trade war between the two countries points to another crash in Japanese share prices today.
The Japanese currency jumped by more than four yen to around Y103.30 to the dollar at one stage during European trading following the 531-point slide in the Nikkei average to 19,459.98.
There were unconfirmed reports that the US Federal Reserve intervened on behalf of the Bank of Japan to halt the surge in the yen and this helped to limit its gains. In London it closed at Y104.22, a gain of Y3.58 since Friday. Earlier, in Tokyo, the Bank of Japan was thought to have bought between dollars 200m and dollars 300m to hold back upward pressure on the yen, but the action had no impact.
Predictions abound that the yen is heading for Y100 to the dollar or even higher. Neil Mackinnon, of Citibank, said: 'The market is positioned to expect the US to talk up the yen, and no one wants to get caught short.'
US officials are debating how to retaliate against Japan's reluctance to open up its markets, which suggests that uncertainty in markets will persist.
The sharp rise in the yen could cripple exporters and undermine hopes of even modest recovery this year.
To moderate the impact of the high- flying yen the Bank of Japan is expected to authorise a fresh cut in the official discount rate, currently 1.75 per cent. Some analysts do not rule out a further pump- priming package on top of the pounds 95bn of tax cuts and spending increases announced last week.
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