Yen surge overshadows Japan unemployment drop

TOKYO (AFP) - A fall in Japan's jobless rate pointed at a recovery in the world's number two economy Friday, but the government fretted that the surging yen could again derail the export-reliant nation.

The fall in unemployment -- the third successive drop -- combined with increased household spending, pointed to a brighter outlook but the data was overshadowed by the soaring yen.

Finance Minister Hirohisa Fujii did not signal imminent plans to intervene in currency markets but stressed that Tokyo was watching closely and could take steps for the first time in five years if the situation worsens.

Fujii was speaking as the dollar traded around 85 yen, lows not seen since the mid-1990s, raising fears that Japanese exporters such as Toyota, Honda and Sony will lose competitiveness in overseas markets.

The dollar briefly dipped to 84.82 yen in early trade before rebounding to just below 86 yen at 0730 GMT.

Fujii, using more strident language than usual, said the yen's rapid rise was "harmful", a day after Prime Minister Yukio Hatoyama said the government must take measures to avoid a double-dip recession.

"If this kind of situation is sustained, I think that it would be something abnormal ... it would be possible for us to take" steps under such conditions, Fujii said, according to Dow Jones Newswires.

"We should take appropriate action against disorderly movements in order to stabilise international financial markets," Fujii said, adding however that he needed time to "look at the situation a bit more".

The benchmark Nikkei stock index tumbled 3.2 percent as the yen's rise hurt exporters and debt problems in Dubai depressed global equity markets.

Commenting on the Japanese unit's rise, Fujio Mitarai, the head of the main business lobby Keidanren, warned that amid the gradual recovery "this could throw cold water on the economy".

Minister for Economy, Trade and Industry Masayuki Naoshima said the surge "poses a big risk to the economy as it is feared to worsen competitiveness and negatively affect business management."

A stronger yen harms exporters, most of whom have assumed a rate of 90-95 yen per dollar for now, because it makes their goods more expensive overseas and reduces the value of their dollar profits when converted to yen.

"In a word, it's tough for business," said Panasonic president Fumio Otsubo.

Japan, Asia's biggest economy, sank into its worst post-war recession in the second quarter of 2008 as the global downturn devastated demand for its cars, electronics and other exports.

It gradually recovered this year, boosted by rebounding exports and stimulus measures, expanding in the September quarter by 4.8 percent on an annualised basis, the best growth in more than two years.

Jobs data Friday showed unemployment fell to 5.1 percent in October from 5.3 percent in September, improving for a third month in a row and beating market expectations of a 5.4 percent rate.

In other data suggesting a gradual rebound, average monthly household spending rose by a price-adjusted 1.6 percent in October from a year earlier, well above an expected rise of 0.6 percent.

Renewed deflation, however, is still seen as a threat to the recovery, because falling prices hurt corporate earnings and dampen consumption as people delay spending in hopes of further price drops.

Japan's core consumer prices fell 2.2 percent in October from a year earlier, marking the eighth straight month of drops, government data showed.

The drop in core prices, which exclude volatile fresh food, was slightly less than September's 2.3 percent fall and in line with expectations.

"Deflationary pressure remains," even if the speed of price drops has slowed, said Hiroshi Watanabe, an economist at Daiwa Institute of Research.

"The economy has picked up since February thanks to an upturn in exports and production. The effect is now belatedly felt on prices and employment."

But he warned: "If the yen rises further, it would dampen exports, which are the main driving force of the Japanese economy. It would weigh down the Japanese economy as its recovery is feeble."