Yen weakens, blows out to 128 level

By staff and wire reports

TOKYO, Japan -- The yen blew out through 128 against the U.S. dollar on Monday morning trade in Tokyo.

It hit 128.03 against the dollar in early trade. That weakness took it to a 38-month high against the greenback, outdoing the 127.96 mark it set late last week.

The Japanese currency stabilized in the afternoon, strengthening to 127.80. But it looks poised to head higher, with officials saying more weakening might help the economy.

A weak yen makes Japanese products cheaper overseas, and it boosts the profits of Japanese exporters like Sony and Toyota when overseas sales are translated back into yen.

Possible problem for Korean won

But a rapid decline in the Japanese currency could pose a problem for countries like South Korea.

The Korean central bank manages the won to keep pace with the yen. Otherwise, Korean companies find it hard to stay level with their Japanese competitors.

The Korean won has been getting stronger since October, gaining from strength in South Korean stocks, whiich have been on a tear. But it has dipped as the yen loses ground.

On Monday, the won was trading at 1291.8 against the dollar.

Kuroda: Finance ministry not worried

In Japan, Haruhiko Kuroda, vice finance minister for internatinal affairs, gave what traders took as a go-ahead to weaken the yen. He said the finance ministry was not sorry to see it move higher against the dollar.

"The speed was a bit fast but we are not worried," he said.

Kuroda is Japan's leading financial diplomat. The man who preceeded him in that post added fuel to the yen's drive on Sunday, when he said this is unlikely to be the end of the yen's run.

Eisuke Sakakibara, known as "Mr. Yen," for his role in turning the currency around from post-World War II highs in 1995, sees it rising as high as 140 against the dollar.

"Japan's economic conditions are quite bad, and bad relative to the United States," Sakakibara said. "So I think it's highly probable that the yen will continue to weaken to around 130, 140 yen."

Few tools in Japan's shed

Sakakibara noted on Sunday that Japan has few tools other than a weaker currency at its disposal. Interest rates are already virtually at zero. With outstanding debt at 140 percent of the countyr's output, the government is looking to rein in spending.

"Foreign exchange is likely the only effective macroeconomic policy tool," Sakakibara said. "The yen's rapid fall to 160-170 would be a different issue, but a decline to around 130-140 would be a slght boost."

The central Bank of Japan begins a policy meeting on Tuesday. After last week's tankan survey showed that business confidence is decidedly frail in Japan, where bankruptcies and unemployment are at a high, the BOJ may take steps to help the economy.

The government has heaped persistent pressure on the BOJ to help out, though BOJ Governor Masaru Hayami has resisted those calls.

Officials say Japan will not make the controversial move of buying foreign bonds such as U.S. Treasuries, a move that would further weaken the yen.

Reuters contributed to this report.