The European Crisis: Dealers lured by safety of the yen

TOKYO - The yen closed at a historic high against the dollar here yesterday as dealers baled out of US and European currencies to take shelter in the Japanese currency.

The spate of yen buying reflected a perception that Japan's low interest rates, recently announced economic stimulus package and overall economic prospects made the currency a safer bet than anything else. The dollar closed at Y120.25; the previous record low was Y121.15, in November 1988. European currencies, including the German mark, were all down on the day.

'If we eliminate troubled currencies like the dollar and European ones, only the yen is left,' said Hitomi Nakatani, a currency dealer at Sakura Bank. 'The Japanese economy is nothing we can boast of, but even so, the yen looks relatively healthy.'

Yasushi Mieno, the governor of the Bank of Japan, said it would take measures in the foreign exchange market if necessary: the bank favoured stable currency rates that reflected underlying economic fundamentals.

Rumours swept the Tokyo currency markets that the Bank of Japan was about to intervene, temporarily halting the slide of the dollar against the yen. But while Mr Mieno did not rule out some central bank intervention, he said that in the long term the appreciation of the yen was 'desirable'.

A stronger yen would make Japan's exports more expensive, in theory helping reduce its trade surplus, which this year is expected to exceed dollars 120bn ( pounds 70bn). However, in practice Japanese companies in the past have managed to absorb far greater appreciations of the yen while continuing to boost their exports.

'The yen has strengthened now because there are no strong currencies in the world,' said Junichi Miyake, the vice-chairman of the Nihon Sogo research institute. 'I do not think the fundamental conditions of the Japanese economy are good enough, but the rate of inflation is low and the surplus is strong and there are no glaring weak points compared with other countries' economies.'

According to figures announced earlier this week, Japan's economy grew at an annualised rate of 1.1 per cent in the second quarter of this year, way below the government target of 3.5 per cent, but still keeping the country out of a full-blooded recession.