Japan economy quakes anew as yen soars against dollar

--Yen drops below 100, making Japan's economy a slowdown or recession more likely --Japan is again suffering from a broad sense of drift, after momentum built up under charismatic Prime Minister Junichiro Koizumi, in power from 2001 to 2006. Parliament, split between the two big parties since last year, is in gridlock, leaving the country without a central-bank governor less than a week before the incumbent steps down. The benchmark Nikkei Stock Average is down 19% for the year. --For Japan, the reverberations from a weak dollar come at a particularly vulnerable time. Despite six years of modest growth(avg 1% since 2002), consumers still haven't opened up their purse strings. The Bank of Japan's benchmark interest rate remains at 0.5%. --The Bank of Japan hoped to raise interest rates to a more normal level, to give itself more flexibility. Instead, it is stuck: It can't raise rates when the economy's outlook is weak, nor can it lower them much. More creative steps by the BOJ are off the table until it gets a permanent new governor. --Japan is particularly vulnerable to currency fluctuations because its economy depends so heavily on exports for growth. Japan's economy grew by 2.1% last year, and more than half of that growth came from exports. --Toyota Motor Corp. sees annual operating profit cut by 35 billion yen, or about $350 million, every time the dollar's value slips by one yen. With the dollar having lost more than 10 yen since the end of last year, that suggests Toyota's profits could take a several-billion-dollar hit. The car maker's president, Katsuaki Watanabe, told reporters yesterday it isn't clear if the company could maintain profit growth if the dollar continues to slide, despite cost cuts and other possible measures. --The last time Japan faced a seriously weak dollar was in 1994 and 1995, when the dollar stayed below the 100-yen level for a year and a half, and reached a historic low of 79.75 yen. Japan fought back by intervening heavily in the currency markets to depress the value of the yen and boosted government spending to help weaker companies. --Savings from the strong yen in no way offset the damage from the rise in commodity prices. Over the past year, wheat prices have more than doubled. Nissin expects higher ingredient costs to shave at least three billion yen off its earnings for the year ending March 31. It anticipates "far greater losses" going forward, the spokesman says. --The good news is that currency markets remain highly traded, with none of the freezing-up that has characterized large swaths of the credit markets.