By Mark Tannenbaum
New York, July 5 (Bloomberg) -- The yen fell to a three-month low against the dollar on speculation the government will increase pressure on the Bank of Japan to pump more money into the banking system to foster growth.
Japan's currency sank to 125.44 per dollar, from 124.45 late yesterday, and reached as weak as 125.60, the lowest since April 4, after the Mainichi newspaper said Japanese Finance Minister Masajuro Shiokawa will urge the central bank to boost the money supply.
``If they were to increase money supply that would weaken the yen no doubt,'' said Tim Mazanec, senior foreign-exchange analyst at Investors Bank & Trust in Boston.
The central bank has been subject in recent months to growing pressure from government officials and politicians to act to boost the economy. BOJ Governor Masaru Hayami has said he wants to see more details on government plans to restructure the financial industry before driving interest rates, already near zero, any lower.
``Japan's economy is looking extremely weak,'' said Stefan Schilbe, an economist at HSBC Trinkaus in Dusseldorf. ``The central bank has got to work with the government'' to improve Japan's economic prospects. Still, the move would encourage ``people to take the new yen and invest it in the U.S.'' or in the euro region, he added. The euro fell to 84.19 U.S. cents, from 84.63 yesterday, and touched its lowest in more than seven months after the European Central Bank left its key interest rate unchanged at 4.5 percent.
Recession
Japan's economy shrank in the first quarter, and a government official has said the second quarter may be worse. On Monday, a Bank of Japan survey showed business confidence waned in June from earlier in the year.
At a meeting of finance ministers of the world's richest countries in Rome this weekend, Shiokawa will express ``strong hopes'' the central bank will take steps to revive the economy, the Mainichi reported, citing unidentified ``international financial sources.''
One way Japanese policy makers could stimulate the economy, which is getting little support from domestic consumers, would be to allow a weaker yen to boost exports. Analysts said they didn't expect any agreement to weaken the yen to come out of this weekend's meeting, although the U.S. and Japan probably would accept a yen closer to 130 per dollar.
The yen fell yesterday after Haruhiko Kuroda, the currency chief at Japan's Ministry of Finance, said: ``It's appropriate to see the yen rise or fall as long as it reflects economic fundamentals.''
The BOJ in March cut its key interbank lending rate by 10 basis points to 0.15 percent. It also said it will push interest rates close to zero. Policy makers next meet on July 12 and 13.
The euro extended this year's decline against the dollar to 11 percent after the ECB left its benchmark interest rate at 4.5 percent, as expected by 22 of 30 analysts surveyed by Bloomberg News. For the ECB, the dilemma is that while the economies of the 12 nations that share the euro are slowing, inflation remains above the central bank's 2 percent annual ceiling