Global finance ministers have expressed concern at the “extreme volatility” of the yen, as the Japanese currency remained near 13-year highs on Monday.

The comments came from heads of the Group of Seven (G7) leading industrialised nations, but they stopped short of prescribing action.

The yen’s rise continued to hit Japanese stocks, with the Nikkei index closing at a 26-year low on Monday.

Japan’s government said it would now move to shore up the share market.

The yen hit a rate of 91.93 yen against the dollar on Monday. On Friday it had touched 90.90 yen against the dollar, its highest level since 1995.

Global co-operation

The G7 leaders commented on the high value of the yen in a joint statement issued after talks in Tokyo.

They said they would co-operate as appropriate to bring stability to battered global markets, but did not give any specific details of how they hoped to lower the yen’s value.

The yen’s rise has concerned Japanese investors, who are worried about its impact on the country’s main exporters, as it makes their products more expensive overseas.

As a result, Japan’s main stock index, the Nikkei, fell on Monday to close at its lowest level since 1982.

‘Tighter controls’

Prime Minister Taro Aso said Tokyo would move to introduce tighter controls on the short selling of stocks, and also pledged increased bail-outs for the country’s banks.

Short selling occurs when an investor borrows company stock owned by another investor, then sells the shares in the market, hoping the price will fall.

If the price does fall, they then buy the shares back at the lower price, pocketing the difference.

Other nations, such as the UK, have already moved to put a temporary ban on short selling in financial stocks.

Japan’s Finance Minister Shoichi Nakagawa added that he would “continue to watch currency markets with great interest”.

The rise in the value of the yen is being driven by two main factors.

Firstly, like the US dollar, it is seen as a haven buy in uncertain times.

Secondly, the yen has risen as a result of the end of the yen carry trade, in which traders used the yen to buy currencies with higher interest rates.

The yen carry trade has been unwinding due to the difference between Japanese rates and those elsewhere in the world narrowing.

This means that traders have pulled out of investments in countries such as Hungary and Iceland, buying back the yen in the process.

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Japan’s cabinet has agreed to provide 1.81 trillion yen ($17bn; £9bn) to stimulate the economy, in what analysts say could be the prelude to elections.

The money is intended to help Japan cope with high energy and food prices at a time of global financial turmoil.

Prime Minister Taro Aso also promised tax cuts and urged the opposition Democrats to support his plans.

Mr Aso’s government is less than a week old, and the Japanese economy is on the brink of recession.

The plans now need approval by parliament, where the government controls the lower house but the opposition Democrats have a majority in the upper house.

Move towards polls?

In an assertive speech on Monday, the new leader criticised the opposition for failing to support government policies in the past.

“From start to finish, the Democratic Party’s stance was to put political manoeuvring first and the people’s livelihoods second and third,” Mr Aso said in his speech.

The Japanese economy is on the brink of recession

Politicians and analysts are describing the speech as the potential opening of campaigning for general elections.

“It’s a bit different from previous policy speeches, probably because of the election,” Chief Cabinet Secretary Takeo Kawamura told a news conference.

Mr Aso does not need to call a vote, but analysts suggest he is likely to call a snap poll in a bid to shore up his political authority, and try to break the deadlock in parliament between the opposition-controlled upper house and government-controlled lower house.

Economic help

The promised tax cuts would be brought in before the end of the fiscal year next March, the prime minister promised.

He also said he would try to achieve a balanced budget by 2010.

Mr Aso said he would take extra steps if necessary, to deal with fallout from the US financial crisis.

Finance Minister Shoichi Nakagawa had said earlier in the day that the stimulus package would help the economy recover.

“I want parliament to debate it and pass it as early as possible to respond to the urgent need for an economic recovery and help the people, the country and local governments,” he told a news conference on Monday.

The government plans to issue so-called construction bonds, to help fund the package.

Mr Aso’s government has already been hit by one resignation – that of transport minister Nariaki Nakayama on Sunday. Former Reform Minister Kazuyoshi Kaneko was officially sworn in on Monday to replace him.

In his speech, Mr Aso said his diplomatic priority was to strengthen ties with close ally Washington while working with China and other neighbours for regional stability, and called for extending a naval mission in support of US-led operations in Afghanistan.

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Japan’s trade gap slipped into the red in August as oil imports surged but exports fell, official figures show.

Excluding January – when exports usually slow in the New Year holidays – it was the country’s first trade deficit since November 1982.

Imports outpaced exports by 324bn yen ($3.09bn; £1.65bn) in August.

The news has heightened fears Japan may be on the brink of recession as it comes hot on the heels of a sharp contraction in economic growth.

Figures released earlier this month showed economic output shrank at an annualised rate of 3% between April and June – its sharpest fall in almost seven years – as a result of falling exports and domestic demand.

Price pressures

The latest trade gap figures showed the resource-poor country was hit heavily by surging raw material costs.

“The data really showed that economic conditions both in Japan and overseas are weakening” Satoru Ogasawara, strategist, Credit Suisse

Rising prices of oil, coal and natural gas drove import costs 17.3% higher to 7.38 trillion yen. Import costs for coal alone jumped 121% and petroleum products by 64%.

By contrast, exports grew just 0.3% to 7.56 trillion yen – mainly as a result of falling automobile shipments.

A record 21% drop in exports to the US, blamed on the current financial crisis, did little to ease fears about a looming downturn in Japan.

‘Faltering’

“The data really showed that economic conditions both in Japan and overseas are weakening,” Credit Suisse strategist Satoru Ogasawara said.

“Demand from not only the United States but also Europe and Asia has been faltering, and it is likely to continue at least until the end of this fiscal year.”

Meanwhile, companies at home have been battling low domestic demand.

Looking ahead, economists believe the news does not bode well for the Tankan report, due out next week.

The closely-watched survey of business conditions is expected to “underscore that the economy is in a recession”, said JP Morgan Securities economist Masamichi Adachi.

A country is generally considered to be in recession when it sees two consecutive quarters of declining economic output.

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Japan has unveiled a stimulus package worth 11.7 trillion yen ($107bn; £59bn) to boost the country’s economy.

The government hopes that the plan will help people cope with rising prices and stave off a recession.

The plan only includes 2 trillion yen of fresh government spending, with 9 trillion yen in loan guarantees and aid for small businesses.

The package is much smaller than the $167bn the US spent on tax rebates and other measures to revive its economy.

“This package is not a one-off,” said economic and fiscal policy minister Kaoru Yosano.

“It is aimed at continuously supporting the Japanese economy as well as people’s lives.”

No tax cuts

The package also includes discounts on motorway tolls, assistance to farms and help for part-time workers to find better jobs.

The measures do not include the temporary income tax cuts that had been advocated by the New Komeito Party, a junior coalition party.

The government has been reluctant to inject a bigger amount of public money into the economy because of the country’s fragile finances.

Spending on emergency stimulus packages in the 1990s, when the country was mired in recession, means that Japan’s public debt is among the highest of industrialised nations.

Inflation up

Japan’s economy is struggling with consumers facing high energy prices and the country’s exporters suffering as the global economy slows.

The economy shrank between April to June. If GDP contracts between July and September then the country will be technically in a recession.

On Friday, data showed that industrial output rose by 0.9% in July, but economists said that the stronger-than-expected figure did not ease fears of a recession.

Other figures released on Friday showed Japan’s unemployment rate fell from 4.1% to 4%, while core inflation rose to 2.4%.

Little optimism

The rise in Japan’s industrial output, against forecasts of a 0.5% drop, surprised analysts.

“As far as July’s data is concerned, the situation for industrial output doesn’t look so bad, as it showed relatively firm shipments while the inventory ratio declined,” said Hiroshi Shiraishi, an economist at Lehman Brothers.

“But for the outlook, while domestic demand is already weak, there is a strong possibility a slowdown in external demand will have a full impact later on. So we can’t be optimistic.”

The rise in the core consumer price index, which excludes fruit and vegetable prices but includes oil, was at the top end of analysts’ expectations.

However, analysts said fears of an economic slowdown made it unlikely the Bank of Japan would raise rates.

“At first glance, CPI’s rise above 2% may be seen as a factor to prompt the BOJ to raise rates soon, but as it has been saying, the impact of high oil prices will come off in the future,” said Junko Nishioka, economist at RBS Securities Japan.

“It’s the downside risks to the economy that will make the BOJ hold fire.”

News reported by The BBC

Japan’s central bank has left interest rates on hold as nervousness about the country’s slowing economy grows.

The Bank of Japan voted to keep the benchmark rate at 0.5% – the same level it has been at since February 2007.

It said that high energy and materials prices and weaker growth in exports had left Japan’s economy – the world’s second largest – “sluggish”.

But the central bank chief said that it was not heading for the kind of slump seen in the 1990s.

The economy was in better fundamental shape now than in the past, when Japan had too large a workforce and capacity for production, Masaaki Shirakawa said.

“There is little risk of the economy falling into a major downturn,” he added.

The central bank forecast that inflation – already at its highest level in more than 15 years – was set to accelerate.

And Japan’s heavy dependence on exports means it is vulnerable to the slowdown in the US and in Europe.

Last week, the government said the economy had shrunk for the first time in a year during the second quarter – with GDP declining 0.6% between April and June

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Japanese consumer confidence slumped to its lowest level for 26 years in the quarter to June, official figures show.

The government’s quarterly index fell to 32.3 from 36.5 the period before.

Rising costs for energy and food have hit sentiment, with wholesale prices hitting a 27-year high in June on surging oil and commodity prices.

Japanese households had become used to falling prices after years of deflation and creeping inflation has damaged confidence, say analysts.

Consumers were more reluctant to buy more expensive durable goods, with their willingness to buy items such as cars and household appliances, falling to a record low.

“This is a very bad number,” said Azusa Kato, an economist at BNP Paribas, referring to the Japanese Cabinet Office quarterly index figure.

“People are less willing to buy than after we had a hike in the consumption tax in 1997. Even the Beijing Olympic Games don’t seem to be helping at all,” she added.

The monthly index, which – unlike the quarterly index is not seasonally adjusted – fell to an all-time low of 32.6 in June from 33.9 in May.

Core consumer prices, excluding fresh food and energy costs, rose 1.5% in May – the biggest increase for a decade.

Analysts said inflation may rise to around 2% in the coming months.

Consumers are feeling the rise in the cost living all the more because wage growth in Asia’s largest economy has been so weak.

The economy has shown further signs of weakness over the past few months.

Retailers reported weak earnings in the three months to June, while industrial firms posted disappointing output in May.

The unemployment rate currently stands at 4% and the central bank has cut its 2008 growth forecast.

It expects growth of 1.5%, down from 2.1%, amid continuing worries about the impact of the US slowdown on global markets.

The US slowdown means demand for Japanese cars and machinery continues to fall.

News reported by BBC

TOKYO (Reuters) – Japan has relaxed its tax code so foreign asset managers and hedge funds can avoid dual taxation, as part of Tokyo’s push to revive itself as a global finance centre.

In a two-step process that began in April with the revision of a cabinet order and finished on Friday, the government has retooled tax rules so offshore funds can avoid being classified as having a “permanent establishment” in Japan.

Commonly referred to as a “PE” in tax law, the classification would force offshore funds — which already pay taxes in their home countries — to pay domestic taxes on any returns made in Japan.

Faced with sluggish growth and a rapidly shrinking population, the world’s second-largest economy is desperate for foreign investment and is especially keen to woo hedge funds, which have an estimated worth of $2 trillion (1 trillion pounds) globally.

Until now many of the loosely regulated funds have been forced to set up shop as “investment advisory firms” in order to avoid the double tax bill.

“We must admit that Tokyo’s presence in international finance has been in decline for some years,” an official at the regulatory Financial Services Agency told reporters.

Data from the FSA shows that while the number of investment advisory companies has nearly doubled to more than 800 in the past four years, the number of investment management firms has languished at around 100 for two decades.

The difference is not insignificant, the FSA reckons, as full investment management firms would draw more people and capital into the market.

The legal change allows local entities to avoid being regarded as having a permanent establishment if they are seen as sufficiently independent of the overseas entity.

Critically, the local entity must bear some entrepreneurial risk, such as receiving pay corresponding to returns on the investment.

That means the Tokyo arm of a U.S. hedge would bear entrepreneurial risk if managers were paid based on the performance of their Japan fund.

If the hedge fund met some other criteria it would be deemed an “independent agent” and not subject to dual taxation.

The tax change also underscores Japan’s regulatory shift in recent years.

Regulators are increasingly worried that the world’s second-largest economy will lag in financial services, losing out to more flexible Asian centres such as Hong Kong and Singapore.

While famous for churning out cutting-edge gadgets, Japan has also become synonymous among foreign investors for hidebound regulation and burdensome taxation.

Restrictions between banks, brokerages and insurance firms were relaxed under a bill passed by Japan’s parliament earlier this month, making it easier for companies to market products across divisions.

News reported by Reuters