Pressure on currency markets and the Japanese economy is expected to continue next week despite a sharp cut in interest rates of 0.75 of a percentage point to a record low of 1 per cent and a package of emergency budget measures.
The lowest Japanese interest rates since 1945 failed to prevent a new fall in shares, which sank 390.9 points to 16,047.89 on the Nikkei index.
Foreign exchange experts were also far from confident the announcements would reverse the strength of the yen even if they halt its rise when trading gets back into full swing next Tuesday after the Easter holiday. But there is still a possibility of renewed intervention on the foreign exchanges by the US and Japanese governments.
The yen was hardly changed at around 83.33 to the dollar in thin New York trading, compared with 83.32 at the opening in Tokyo.
The yen has risen 20 per cent this year against the dollar. This has put Japan in a tight squeeze, raising fears that it could be trapped in a deflationary spiral.
The economy has already been on its knees for two years, with real output flat, prices flat or falling and the banking system trapped by bad debts caused by a property lending crisis whose effects are expected to spread well past the end of the century.
At the same time the yen has been driven to new highs against the dollar, boosted by the strength of the Japanese trade balance. The strong yen is bound to have a cumulatively powerful dampening effect on exports because it makes Japanese products so expensive. This is further damaging an already weak domestic economy.
But the trade surplus is proving hard to reduce at a time when poor demand and regulatory restrictions at home are hampering imports. Japanese companies are also moving production capacity abroad to avoid the effects of a strong yen, which requires continued exports of high value manufacturing equipment.
Japanese hopes of an immediate rise in US interest rates to help reverse dollar weakness against the yen were dashed by news that US industrial production dropped in March for the first time in six months. American factories operated at lower percentages of capacity in March for the second month running, another sign that the economy is cooling off and that the Federal Reserve is likely to keep interest rates unchanged in the near term.
In Tokyo, economists and investors said they were disappointed with the mini-budget package, but the government said it would cut the current account surplus, speed up deregulation, boost imports, stimulate the economy and revitalise markets.
It emerged that civil servants undermined politicians' efforts to set a target for cutting the surplus, which analysts said would have given greater confidence.
The highlights of the package of measures were:
o Advancing the implementation of a five-year economic deregulation plan to three years;
o Early implementation of a supplementary budget to fund reconstruction efforts following the Kobe earthquake on 17 January;
o Speeding up other public works spending;
o Making further efforts to cut Japan's trade surplus, one of the underlying causes of the yen's strength, by promoting imports;
o Promoting the yen as an international currency;
o Steps to support smaller businesses hurt by the high yen.
The emergency package also set a five-year target for solving the problem of bank bad debts and said measures "not previously employed" would be used.
Analysts said the vague wording made it hard to expect concrete steps immediately, but the message had increased hopes of a bailout of troubled banks and housing loan companies.
The Japanese trade surplus narrowed slightly in March from $13.9bn to $13.84bn, the Finance Ministry said, but the politically sensitive surplus with the United States widened to $5.08bn from $4.94bn a year earlier.
Figures for the year to end-March showed Japan's trade surplus with the US widened to $55.66bn from $51.12bn in 1993/94. However, Japan's total trade surplus dropped for the first time in four years, by a modest 3.2 per cent to $117.98bn.Reuse content