Weak yen 'reflects fundamentals'


The yen has lost ground dramatically in December, and broke through 130 to the U.S. dollar on Tuesday in Tokyo

By staff and wire reports

TOKYO, Japan -- As the yen broached 130 to the U.S. dollar Tuesday, the country's top financial diplomat said its current weakness reflects Japan's economic fundamentals.

But Vice Finance Minister for International Affairs Haruhiko Kuroda said a slide beyond those fundamentals was undesirable.

The yen has been under pressure in the foreign exchange market, falling to a fresh three-year low against the dollar of 130.04 in Tokyo Tuesday morning. It continued to weaken during the day, touching 130.80 late in the afternoon.

That is the lowest since October 1998.

"A decline in the yen beyond what is warranted by fundamentals is undesirable. But at the moment, it's still reflecting fundamentals," Kuroda told reporters.

The Bank of Japan's monetary easing last week was an appropriate policy action and was one reason for the yen's softening, he added.

'Not desirable'

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Japan's Trade Minister Takeo Hiranuma on Tuesday repeated his warning of a day earlier that he did not want to see the yen decline against the dollar any further.

"A weaker yen has both positive and negative aspects for the Japanese economy, but it is not very desirable for it to go further from here," Hiranuma said on Monday, according to Jiji news service.

On Tuesday, Kyodo news service quoted Hiranuma as saying that the yen-weakening trend was likely to continue, but he hoped that it did not.

The yen has weakened dramatically in the last month. It was at 120 to the dollar at the start of December.

Sudden moves in the currency make it harder for companies doing business with Japan to adjust. The yen has also started to pressure currencies like the Korean won and Taiwan dollar. China is also concerned at the potential impact on its exporters.

A weaker yen makes Japanese exports more attractive abroad, at a time little is going right for Japan's economy.

Finance Minister Masajuro Shiokawa said Friday the government isn't driving the yen's weakness. But the currency's decline is reasonable, he said, a response to economic fundamentals.

Worries about banks

"I think the market is reacting rationally," he said, according to Reuters news agency. "We are not intending to drive the yen lower. I think it shows the market reacting to the Bank of Japan providing more liquidity."

Poor economic fundamentals and worries about Japan's banks are the underlying reasons for the currency's decline.

Japan is suffering its fourth recession in a decade, and its banks are battling a rising portfolio of bad loans.

Unemployment is at an unprecedented 5.4 percent. Bankruptcies are up. Fourteen public companies have gone under this year, as banks rein in their lending. And investors expect more failures.

Although Japan's economy is laboring, the government of Junichiro Koizumi is pushing ahead with reforms and efforts to curb spending. Previous governments have tried to spend their way out of trouble.

The cabinet on Monday approved a draft budget for the fiscal 2003 year that cuts spending by 1.7 percent, for the second consecutive year of declines.

The outline pegs Japan's spending for the year starting April 1, 2002, at 81.2 trillion yen ($627 billion).

Reuters contributed to this report.