Signs of Japanese recovery cut dollar

THE DOLLAR fell against the yen after a quarterly Bank of Japan survey confirmed that the Japanese economy is heading for recovery, writes Diane Coyle.

With US-Japan trade talks reopening in Washington today, analysts said currency markets were preparing for a period of turbulence as the end-of-September deadline for the talks approaches.

The dollar was also hit by a flight into the German mark as traders responded to fears of a two- speed European Union.

The Bank of Japan's Tankan survey found business pessimism ebbing. Its 'diffusion index', measuring the balance of companies expecting the outlook to improve, was minus 39 for big manufacturers in August, compared to minus 50 in the May survey. The balance improved from -42 to -33 for big companies outside manufacturing. The bank predicted further improvements.

Saburo Sano, an economist at New Japan Securities, said: 'The survey shows a picture of the economy which is exactly in line with a moderate recovery.'

The one area where the outlook had worsened since the May survey was capital spending plans, with a fall of 3.8 per cent predicted for 1994/95. However, this would still be a big improvement on the 11.3 per cent decline in 1993/94.

The Bank of Japan said the appreciation of the yen during the quarter, from Y103.51 to the dollar in May to Y99.61 in August, had slowed the tempo of recovery. Masayoshi Takemura, Japan's Finance Minister, told a conference yesterday: 'A further depreciation of the dollar would not be right.'

Steve Barrow, a currency economist at Chemical Bank in London, said: 'There is not going to be progress on the trade front this week. Pressure on the dollar will continue.'

It closed down Y0.61 at Y98.64, and down 1.23 pfennigs at DM1.5420 in London. New York shares at noon were also lower.