LONDON (AFX) - The yen continued its slump in midday trade, battered by what the market construed as messages welcoming the currency's depreciation from both Bank of Japan governor Masaru Hayami and finance minister Kiichi Miyazawa.
Hayami suggested that a "massive depreciation" of the currency may be a policy option to tackle deflation while Miyazawa talked of an "extreme recession" in the country.
"It looks like the Japanese policy makers are prepared to let the yen go to fight deflation," Kamal Sharma, strategist at Commerzbank said.
There was some back pedalling after Hayami's remarks but the damage had been done, he said, adding that the yen looks set for a period of greater weakness.
"We remain bearish on the yen, with 124 to the dollar looking possible going by the very weak fundamentals," Sharma said. Japan is seen sliding into a recession, technically, if as expected it shows another quarterly fall in GDP.
Amid heightened deflationary pressure, consumers appear to be caught in a liquidity trap while there is still no sign of a fiscal stimulus package to restart the economy, Sharma said.
The yen story dominated the market, spilling over to benefit the euro, which found a stable footing above 0.93 usd after several days of hovering around that level.
There were no Euro zone data of enough importance to detract from the yen- led strength.
Hints that the global slowdown is starting to affect the German economy went by hardly noticed.
German manufacturing orders fell a seasonally adjusted 3.9 pct in January from December and were up an unadjusted 14.1 pct from a year earlier. Further, December figures were revised down to a 2.0 pct monthly increase. The previous estimate was 2.7 pct.
Sterling was steady, even gaining a little on the euro ahead of the budget set for 3.30 pm UK time.
"Players are sidelined mostly, ahead of the budget," Sharma said. Adam Chester, economist at Halifax dismissed speculation that Chancellor of the Exchequer Gordon Brown may lower the official 2.5 pct inflation target.
"There has been no consultation and it will look like political manipulation of interest rates," Chester said.