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The yen hit a 22-month low of 123.35-38 to the dollar late Monday as deepening pessimism about Tokyo stocks and Japan’s banking system dominated the currency market.

The Bank of Japan’s move to inject more liquidity into the faltering economy could keep weighing on the yen, taking it to 130 to the dollar in a month or two.

With industry in no mood to increase capital investment, gross domestic product is now expected to fall short of the year-earlier level for the second-consecutive quarter in the April-May period.

The economy is not likely to bottom out until after the July-September quarter, and economic growth for all of fiscal 2001 could settle at 0.3 percent at best.

Now that Japan’s troubled banking system and deepening economic crisis are fueling fears of increased pressure on the U.S. economy as well, there is speculation that Tokyo and Washington have an unspoken agreement to let the yen weaken further — a policy option considered advantageous to both of them.

Given the agreement at the recent meeting of finance leaders from the Group of Seven industrial nations that exchange rates must reflect underlining economic fundamentals, the speculation may not be completely off base.

Although a stronger dollar will erode U.S. manufacturers’ competitive position on export markets, the administration of President George W. Bush appears worried more about an adverse impact of a Japanese economic crisis on the U.S. economy.

In a major shift in policy, the BOJ declared Monday that it would reinstate a “zero-interest-rate” policy to revive economic growth.

The central bank also signaled to the marketplace that it intends to increase outright purchases of government bonds and funnel more money into the banking system as part of quantitative easing.

The financial market has also been relieved that the government has indicated it will come to the rescue of the beleaguered stock market.

The ruling coalition is advocating a private stock-buying fund, and Finance Minister Kiichi Miyazawa has indicated willingness to adopt fiscal measures to cover any losses suffered by the fund.

All government offices appear to be stepping up efforts to rescue the economy.

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