The yen dropped after Japan's minister for financial services damped optimism the government will rescue banks, burdened with trillions of yen in bad loans.
Japan won't ``force'' public money into the banking system, the official, Hakuo Yanagisawa, said. Some banks may fail before the end of the fiscal year on March 31 without government aid, dimming demand from foreign investors for Japanese financial assets, analysts said.
"The economy is still getting worse and [policy makers] have not come up with any plans" to end the recession, said Tim Mazanec, senior currency trader at Investors Bank & Trust in Boston. A drop in Japanese stocks also hurt demand for the currency, he said. The Nikkei 225 stock index broke its longest climb in more than a year after Yanagisawa's remarks.
The yen declined to ?132.62 per dollar on Friday from ?132.11 on Thursday.
It fell to ?115.83 per euro from ?115.47. The US dollar traded at US$0.8734 per euro compared with US$0.8737 on Thursday, unchanged for the week.
The yen strengthened 1.6 percent against the dollar this week on speculation the government would help banks stay solvent while they write off about ?151 trillion (US$1.13 trillion) in loans that aren't being repaid.
Japan's banks, which received ?9.3 trillion of public funds in 1998 and 1999, may need help again as Japan's third recession in a decade sends unemployment and bankruptcy rates higher, analysts said.
Legal questions
The government cannot legally make banks accept a bailout unless there's a "series of bank bankruptcies or financing troubles," said Yanagisawa.
Some banks may fail after the fiscal year ends on March 31, when the government stops some deposit guarantees and banks must report their holdings at market value. Japan's stock market lost a quarter of its value in the past year.
"I don't think [a bank bailout] will happen just yet," said Simon Rubinsohn.
He helps manage ?23 billion (US$33 billion) as chief economist at Gerrard Ltd. "Until this issue is resolved, the yen won't move much higher."
It will fell to ?140 per dollar in "a couple of months," he said.
The yen's decline accelerated after a report showed 1,543 companies failed last month, a 10.6 percent jump from a year earlier, Tokyo Shoko Research Ltd said. Japanese corporate bankruptcies rose to a 17-year peak last year.
The Nikkei stock index slipped for the first day in six, breaking its longest climb since January.
"Another bad number underscores the extreme weakness of the economy and that they need to draw up some plans" to spark growth, said Investors Bank & Trust's Mazanec.
"More disappointment in Japan" from skepticism Prime Minister Junichiro Koizumi will quickly enact reforms may further weaken the currency, he said.
Koizumi on Wednesday told ministers responsible for the economy to draft measures by Feb. 28 to halt deflation and pull Japan's economy out of recession. He said the package would include more aggressive measures to speed up bad debt write-offs and stabilize the banking system.
Koizumi said he will explain Japan's plan to revive its economy when he meets US President George W. Bush in Tokyo Monday. The meeting comes after the US administration last month started increasing pressure on Japan to fix its economy.
US Treasury Secretary Paul O'Neill has said that Japan must come up with new policies and a timetable to succeed in restarting growth, which has slumped for 11 years.
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