TOKYO, Nov. 26 (Xinhua) -- The Japanese yen soared against the U.S. dollar on Thursday reaching the upper 86-yen level in a sharp appreciation not seen since 1995. As the dollar abruptly fell against other major currencies too, domestic concerns about foreign exchange volatility possibly resulting in a double-dip recession are becoming increasingly pervasive.

The Japanese yen soared against the U.S. dollar on Thursday reaching the upper 86-yen level in a sharp appreciation not seen since 1995. (Xinhua/Reuters Photo) Photo Gallery>>>

    The yen surged to highs of between 86.72 and 86.75 yen at one point shortly after noon on Thursday -- an all-time high since July 1995. The dollar traded between 87.19 and 87.22 yen on Thursday compared to Wednesday's 5 p.m. quotes of between 87.29 and 87.39 yen in New York and 88.35 and 88.36 yen in Tokyo.

    Such is the consternation over the immediate and long-term effects of the yen-dollar exchange rate on the Japanese economy that Japanese Finance Minister Hirohisa Fujii was compelled to make a statement to the press.

    "Now is an appropriate time for the country's policymakers to monitor the yen's upward trend," Fujii told reporters, alluding to there not being any immediate administrative intervention in the currency markets.

    When pressed on the issue Fujii declined to elaborate saying he would not comment on the possibility of joint intervention in the foreign exchange market, and would be cautious about saying anything given the uncertainty over recent currency moves and the complications presented.

    "We are currently monitoring (the yen's upward movements) and It hink now is the time to be vigilant," said Fujii.     

    EXPORTERS SUFFER

    Japan is an export-driven economy and exporters rely on favorable currency exchanges so as to maximize profits made abroad when the yields are repatriated into Japanese currency.

    On average domestic exporters have assumed exchange rates of around 90-95 yen to the dollar for the current fiscal year and although many have reassessed their forecasts in line with the yen's appreciation for the October-March latter half of the fiscal year, further appreciation of the yen, as has been seen on Thursday eats into profits made abroad.

    A spokesperson for Nissan Motor Co., which set its benchmark at85 yen against the dollar, said it is still likely to see a loss of about 11 billion yen on an operating level. Similarly Toyota Motor Corp. assumes the dollar will trade at the 90 yen level in the latter half of its fiscal year, meaning a rise of 1 yen will erase about 25 billion yen from its operating profit on an annual basis, Japan's number one automaker said.

    "We are reaching a level where cost cuts alone will not get us anywhere," a senior official at Sony Corp. said, adding that a stronger yen will further hurt its price competitiveness in the marketplace.

    A representative at a major heavy industry firm also weighed in on Thursday saying, "There will be a huge impact so we hope this (current level of the yen versus the dollar) is temporary," an official at Fuji Heavy Industries Ltd. commented.     

    DOLLAR WEAKNESS

    Key U.S. economic data pertaining to consumer spending, unemployment benefit claims, the University of Michigan Consumer Sentiment Index and new home sales, were released on Wednesday. The data revealed positive signs that the U.S. economy is improving, according to analysts and in turn U.S. investor sentiment became increasingly optimistic.

    Rather than opting for significantly low returns on U.S. dollar investments, market players' appetite for assets in higher-yielding currencies increased. Coupled with this, overseas trading on Wednesday led investors to believe the current U.S. low interest rate policy is likely to continue for a prolonged period of time, according to brokers.

    Another factor contributing to the dramatic weakening of the dollar was the release on Tuesday of the U.S. Federal Open Market Committee's meeting minutes from discussions held earlier in November. The summary of discussions held by the committee was interpreted by market players on Tuesday as the Federal Committee's acceptance and tolerance of a falling dollar, which ignited negative sentiment about the currency across markets.     

    GOVERNMENT ACTION

    Wholesale restructuring, cost cutting and equity financing initiatives have already been employed by many of Japan's large corporations in a bid to combat downturns brought on by yen appreciation and general lack of investor optimism regarding buying into Japanese companies -- particularly in export and tech-related firms. Company officials have warned that the measures they have taken may not be enough to keep them competitive if the yen continues to appreciate and are calling for government intervention into the currency crisis.

    "The current level of the yen is extremely problematic," Shoji Muneoka, chairman of the Japan Iron and Steel Federation, told thepress Thursday. "A stronger yen could serve as a trigger for double-dip recession."

    "The government should keep a close eye on economic conditions, and proactively take every possible step in its power, deploying financial, monetary and other policy tools," said Muneoka. "It is imperative to stem the yen's rise. If the government fails to bring the currency back to a certain level, the economy will be dealt a huge blow," he warned.

    The head of the Japan Chamber of Commerce and Industry, TadashiOkamura, also urged the government to swiftly address the yen's sharp appreciation against the dollar on Thursday.

    "The government should fully take into account the possible implications for local economies and smaller businesses before taking any action," Tadashi Okamura commented.

    Okamura also warned that foreign exchange volatility may result in a double-dip recession, given that the yen's appreciation is expected to further damage exporters, who are already reeling under bleak economic conditions in Japan.

    The yen has advanced 7.8 percent against the dollar in the past three months. The Japanese authorities haven't stepped into the currency market since the first three months of 2004.

Special Report:  Global Financial Crisis