London, May 18 (Bloomberg) -- The yen fell for the fourth day in five against the dollar on concern the Bank of Japan may flood the market with its currency, as it boosts money supply in an effort to stimulate growth. The bank said it will buy a wider array of bonds from investors. Although it stopped short of saying the amount of bond purchases will increase, the prospect of the central bank adding more yen into the economy was enough to weaken the currency.
``If you pump up the supply of money, markets will be less comfortable holding the yen as there's more of it around,'' said Tony Spence, who helps oversee about $19 billion at First Quadrant Ltd. The Japanese currency weakened to 123.40 per dollar from 122.61 yesterday. It has shed 7 percent against the U.S. currency this year. Against the euro, it fell to 108.29 from 108.19. The euro fell to 87.74 U.S. cents from 88.23. Japan's central bank said it will buy bonds with maturities of two, four, five and six years on top of the 10- and 20-year bonds it already buys. Not Enough Bids The changes have occurred because the bank has failed 13 times this month to get enough bids from banks to sell securities it offered to buy, the BOJ said. The auctions are aimed at giving the BOJ more funds to inject into the banking system. Still, commercial banks are already flooded with cash and, with demand for loans having fallen for the past 39 months, they see little need to have more money on hand. ``In theory, increasing liquidity should be positive as it boosts economic activity,'' said Sonja Hellemann, a currency strategist at Dresdner Kleinwort Wasserstein. As loan demand is weak, ``the way of increasing liquidity in Japan has broken down, meaning you're just left with more supply and no demand.''
The prospect of raising the supply of money also prompted inflation concerns, even as the BOJ is forecasting consumer prices will fall in the next year, some analysts said. ``Injecting more liquidity into the markets raises the prospect of higher inflation in the next eight to 10 months, plaguing the yen,'' said Kamal Sharma, a currency strategist at Commerzbank.

Euro
The euro fell to its lowest in two days against the dollar after a report on money supply released by the European Central Bank yesterday heightened concerns about the bank's credibility. Investors were surprised last week when the ECB unexpectedly cut its benchmark interest rate by a quarter of a percentage point to 4.5 percent, having stressed for months that inflation is too high to make such a move. In the report, the ECB said money supply, which policy makers use to estimate inflation in the future, has expanded less than reported this year. Growth in M3 may be about 1 percentage point less than the three-month average of 4.8 percent published on April 30, the ECB said in its May report.
ECB President Wim Duisenberg justified last week's cut by saying that M3 figures were wrong and should have been half a percentage point lower than initially reported. The ECB yesterday went even further, saying money supply growth may be a further half point lower than indicated by Duisenberg. This adds to ``questions about the ECB's credibility which have been raised over the past week,'' said Jane Foley, a currency strategist at Barclays Capital. The euro may fall to 85 in the next three months, she said.
Still, the changes give the bank scope to lower borrowing costs again, analysts said. ``Anything lowering inflation is a good thing,'' said Lee Ferridge, head of global currency strategy at Rabobank International. ``The ECB has more room to cut rates again. It's a boost from nowhere, which is a good thing.'' A report today showed industrial production in the dozen nations that share the euro fell in March, another sign the European economy is struggling to grow amid slower expansion in the U.S.