New York, Aug. 19 (Bloomberg) -- The yen had its biggest drop against the dollar in almost two weeks and fell against the euro after Standard & Poor's suggested it may cut Japan's credit rating. Japanese regulators last month said they may exempt some bank deposits from a plan to cap deposit insurance. The move would do less to discourage bad loans, which rose an annual 22 percent to 52.4 trillion yen in March and are weighing on the nation's recovery from its third recession in a decade, analysts said.
Japan ``needs to quicken changes to the banking system to get the economy moving there,'' said Murray Gunn, who helps manage $120 billion at Standard Life Investments in Edinburgh, Scotland. ``This is a reminder to the market'' and is hurting the currency. The yen weakened to 118.63 per dollar at 9:15 a.m. in New York, from 117.65 Friday. It fell to 116.15 per euro from 115.85.
``A string of policy decisions recently announced by the Japanese government appear to backtrack on reforms,'' S&P said in a report. Delays in reducing national debt and disposing of bad bank loans ``will undermine the prospects for an economic recovery.'' `Further Warning' S&P cut the rating on Japan's yen-denominated bonds a third time in 14 months in April. A cut by one level from the current AA- rating would put Japan on a par with Botswana and Kuwait. Japan's national debt will rise to 693 trillion yen by March, the government forecast. That's equal to 140 percent of gross domestic product and would be the highest debt burden among industrialized nations. ``This is a further warning about the state of the Japanese economy,'' said Steven Saywell, a currency strategist at Citigroup Inc., in London. ``It is an indication of the economic and financial risk of investing in Japan. We are bearish on the yen.''
Japan's currency dropped as the closely watched Nikkei 225 stock average shed 1.9 percent, damping demand for the currency to buy shares. Exporters such as Toyota Motor Corp., whose overseas sales account for more than half of its revenue, led the decline. The yen is still 11 percent higher against the dollar this year, boosted by investors seeking alternatives to slumping U.S. stock markets and sluggish U.S. profit growth. Any rise in the dollar against the yen today may be limited on expectations an index of leading economic indicators due today may show growth in the world's biggest economy will probably slow. The index, intended to forecast the economy's performance over three to six months, probably fell 0.5 percent, according to a Bloomberg News survey of economists.