Rally in Japan as dollar falters

PAUL WALLACE

Economics Editor

The rally of the dollar galvanised the Japanese stock market. The Nikkei 225 index stormed ahead by 706 points to close at 18,159, its highest since 13 February and the second-biggest rise of the year.

But the dollar, after reaching new highs of Y99 and DM1.4930 in early trading in Japan, came off the boil, first in Tokyo and later in London. It closed at Y97.81 and DM1.4773 - still up by about a yen on Tuesday's close and half a pfennig against the mark.

Sterling ended the day virtually unchanged on the levels it reached on Tuesday.

However, the strengthening of the pound has already taken it up nearly 2 per cent since the last week in July, when the bank of England's Inflation Report was prepared.

David Mackie, UK economist at JP Morgan, said: "Sterling has already appreciated enough to push the Bank of England's inflation forecast back inside the target range."

Other City analysts shared this view. "The recent rise in sterling may well be enough for the bank of England to relax its view on base rates and agree with the Chancellor's wait-and-see policy," Adam Cole, economist at James Capel, said.

The further evidence of subdued pay inflation also encouraged the City. "The labour market's performance in this cycle is set to be the least inflationary since the 1960s," Kevin Darlington of ABN Amro, said.

Together, this was sufficient to give a fillip to the gilts market. The September gilt future ended the session half a point up. A rise in the December short sterling future, used to speculate on short-term interest rates, showed that some of the alarm about higher rates aroused by the poor producer price figures at the beginning of the week had gone.

The rise in the Tokyo stock market was fuelled by heavy foreign interest, which was expected by analysts to continue as foreign institutional investors rebalanced their portfolios. Foreign interest was particularly strong in export stocks which which will benefit from the fall in the yen.

However, a further rise above 20,000 was seen as unlikely unless the government delivered the goods in the form of a package on bad debts and a fiscal boost to the economy.