By Christina Fincher
LONDON, March 18 - Japan's currency tumbled two yen against the dollar on Monday, its biggest one-day drop in almost six months, as a slide in Tokyo stocks fuelled concern that recent flows into Japan have started reversing. The dollar's sharp gains against the yen also lifted it against the euro, allowing it to claw back ground from Friday's seven-week lows. The yen has been boosted over the last month by Japanese investors bringing money home to bolster balance sheets ahead of the fiscal year-end on March 31. Such flows have also led to hefty gains in Japanese stocks, but the benchmark Nikkei index closed down 1.28 percent on Monday. "Markets are now looking to what will happen after the fiscal year-end, when government incentives to keep the Nikkei high will dissipate," said Shahab Jalinoos, currency strategist at UBS Warburg. Japan's government has been keen to prop up Japanese asset prices ahead of the year-end to prevent companies writing down hefty losses on their portfolios which could potentially trigger bankruptcies. Once bookclosing has ended, many suspect Japan would prefer to see a weaker yen as a way of fostering an export-led recovery. By 1245 GMT, the dollar was up 1.6 percent at 131.25 yen, just shy of earlier one-and-a-half week highs at 131.44. Dealers said a report by rating agency Standard & Poor's drawing attention to the lack of structural reform in Japan was putting additional pressure on the yen, which also slid more than one percent to one-and-a-half week lows around 115.50 per euro DOLLAR PERKS UP
The dollar was trading over a third of a percent higher against the euro at $0.8790 , having clawed back from last Friday's seven week lows around $0.8870. Dealers said the dollar was drawing broad-based support after the New York Times reported at the weekend that U.S. Treasury Secretary Paul O'Neill told a foreign policy thinktank he disagreed with the White House decision to impose tariffs on steel imports. The tariff decision has raised concern over the U.S. administration's commitment to a strong dollar policy, which makes U.S. exports less competitive. "That's interesting if he disagrees. On balance that may be a small dollar positive," said Jesper Dannesboe, head of foreign exchange research at Dresdner Kleinwort Wasserstein. Dealers said speculators were also being tempting to cut back on long euro/dollar positions after the single currency failed to make much headway last week. "We couldn't get much past the $0.8850 area and people have been bailing out of long positions," said Rob Hayward, senior foreign exchange strategist at ABN-Amro. However, it was the yen that was most vulnerable to such selling after speculators loaded up on long positions after its rally to three-month high of 126.36 to the dollar earlier this month. An IMM Commitments of Traders Report on Friday showed the speculative market was net long 6,898 yen contracts in the week ended March 12, the largest net-long stance since early October. FOCUS ON FED
There are also expectations the Federal Reserve will take a brighter economic view when its Open Market Committee meets on Tuesday and will shift to a neutral stance from the tacit easing bias of the past 16 months. A survey of 24 primary dealers on Wall Street found 19 expecting such a shift, up from 14 out of 21 the week before. The Bank of Japan meets on Tuesday and Wednesday and while no major move is expected it is likely to firm up measures to make it easier for banks to get funds for the March 31 fiscal year-end. There is also speculation the BOJ will slightly upgrade its assessment of the economy in its March report, to be released on Friday. That would be the first such upgrade in 20 months. However, analysts noted such a move would not imply a rise in underlying demand at home but rather the boost to exports from the surprising strength of the U.S. economy. The Swiss National Bank holds its policy meeting this week and speculation of a rate cut increased after SNB President Jean-Pierre Roth told a local Sunday newspaper that the bank could cut interest rates further. The Swiss franc, which soared to two-month highs against the dollar last Friday, softened on the comments.