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The yen has given up much of its recent gains and now sits just about where it did earlier in the year.

Last month’s government measures to fight deflation helped stabilize the falling Tokyo stock market.

Stock prices have forged ahead strongly in recent weeks, dragging the yen up with them.

The yen has come under fresh downward pressure, however, reflecting a shift in money flow back to the dollar.

After hitting 126 to the dollar on March 7, the yen fell and is now hovering around 133. The yen has apparently exhausted its near-range upward potential against the dollar.

Given the growing optimism over U.S. economic prospects, the dollar appears likely to gain more ground.

Earlier this month, the policy-setting open market committee of the U.S. Federal Reserve shifted its policy away from its recent easing bias toward a neutral stance for the first time in 15 months.

A year-on-year increase of around 3 percent in the U.S. gross domestic product is now widely expected for this year, instead of growth of some 1 percent projected earlier.

Although Japan’s economy is finally crawling out of a critical situation, given the gap in underlying economic strength between Japan and the U.S., the yen can hardly be favored over the dollar.

A seasonal pickup in Japanese institutional investors’ purchases of foreign securities at the start of the new fiscal year in April will also weigh on the yen’s value.

An anticipated rise in yields on U.S. investment vehicles is now beginning to be factored into U.S. securities prices.

The U.S. federal funds rate, now at 1.75 percent, is expected to rise to around 4 percent in spring 2003.

Even if the Fed raises key interest rates, the favorable U.S. market environment is helping ease selling pressure on U.S. Treasury notes and bonds.

The yen may ease to near 140 to the dollar in the near term, but a further fall appears unlikely. Tokyo will then openly caution against a “sell Japan” mentality, while a weak yen will prompt U.S. manufacturers to seek protectionist policy measures.

Given all these potential factors, the yen appears likely to remain locked within a narrow range above 130 for some time.

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