Bank of Japan expected to lower discount rate: Yen hits record despite dollars 1bn-a-day attempt to halt rise

SPECULATION mounted yesterday that the Bank of Japan would soon cut its discount rate in an effort to stimulate the weak Japanese economy and topple the high-flying yen.

The yen yesterday hit yet another post-war record, coming within a whisker of Y100 to the dollar despite repeated attempts by the Bank of Japan to halt the ascent. The Japanese central bank is estimated to have spent dollars 1bn a day in the past six trading days to stop the yen surging against the dollar. But its efforts are being frustrated by growing worries over the health of the US economy.

Speculation has already surfaced that the US Federal Reserve may be forced to ease US interest rates this autumn if indications of economic weakness persist. The Fed's policy-making open market committee meets today, but no immediate decision to ease credit conditions is expected.

US indicators out yesterday brought little cheer. US industrial production rose 0.4 per cent in July, as expected, but the increase was partly due to stepped-up electricity production owing to unusually hot weather. Automobile production fell, dampening hopes that the economy would be pulled up by increased demand for cars in the early autumn.

The yen touched a record Y100.80 to the dollar in Tokyo yesterday and dealers predicted that it would soon achieve parity with the US cent, deepening the economic pain for Japanese exporters and putting at risk recent gains in Japanese share prices. In London yesterday, the yen eased back to Y101.05 to the dollar, but this still represented a gain of Y1.4 on Friday's close.

Some analysts predict the Bank of Japan will cut the discount rate, now at a historic low of 2.5 per cent, by half a point this Thursday and reduce it by a further half-point later. But few expect the move to weaken the yen substantially. George Magnus, chief international economist at Warburg Securities, said: 'A lower discount rate and the fact that the government is going to take measures to boost the economy may mean the yen has further to rise. A stronger economy would be a magnet for funds into Japan.'

Meanwhile, the French Finance Minister, Edmond Alphandery, described as 'totally absurd' the idea that France planned to go back on its decision to scrap exchange controls, a step taken with the goal of European economic and monetary union in sight.

There was little reaction in the gold market to reports that George Soros, the New York-based speculator, had sold his entire holding of physical gold. Dealers believe he still possesses physical gold holdings in addition to his shares in Newmont Mining.

Steady demand yesterday pushed gold prices dollars 5.50 an ounce higher to a closing dollars 373 per ounce. There was also scepticism over rumours in the foreign exchange market that the Bank of France has sold gold in the days since the virtual collapse of the European exchange rate mechanism.

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