The Bank of Japan (BOJ) has announced emergency measures to boost lending aimed at combating the rising value of the yen.
Following an emergency meeting, the central bank said it would increasing lending to commercial banks by 10 trillion yen ($117bn; £75bn).

The measure is designed to stem the value of the currency, and boost lending to businesses.

Meanwhile the Japanese government has announced its own plans for a 920 billion yen stimulus package.

Prime minister Naoto Kan said ministers had agreed a plan to fight the rise in the yen, as well as to try and counter weakness in some economies – especially the US and in Europe – that buy Japanese goods.

Analysts fear the rising yen is undermining the country’s fragile economic recovery.

When making their plans for the year, many companies had been betting on the yen staying at about 90 to the dollar. So when it hit a 15-year high of 83 yen, it bit deeply into their profits.

A strong yen makes exports less competitive overseas. It also reduces the value of profits made abroad when they are repatriated to Japan.

In a statement, the BOJ said its decision to boost its low interest bank loan programme meant 30 trillion yen was now available for lending.

“The bank believes that the monetary-easing measure, together with government efforts, will be effective in further ensuring Japan’s economic recovery,” it said.

The BOJ hopes that increasing the amount of loans available will reduce market interest rates, curbing rises in the yen.

Last week the currency hit a 15-month high against the dollar – potentially a significant problem for the Japanese economy which relies heavily on exports for growth.

Global markets are in the doldrums and with decreased trading volumes and a lack of positive data there has been little to prevent a downward path this week. The Dow is down 2.23% on the week and just over 6% on the month, slipping below the critical 10,000 level (closing yesterday at 9,985). S&P and Nasdaq have followed suit heading into the end of the month 6.7% and 6% down on the month.

In the UK the FTSE clawed back from the 6 week low of 5070 seen on Wednesday but is still 3.50% down on the month.  In Asia, the Nikkei and Hang Seng haven’t bucked the global trend also down 5.5% and 2% on the month.

Yesterday the Labor Department in the States reported a reduction in new U.S claims for unemployment benefits. Initial claims for state unemployment benefits fell 31,000 to a seasonally adjusted 473,000, below market expectations for a drop to 490,000.

However this figure did little to support the dollar as firstly the claimant’s number still remains high and there is still a real concern about the recovery of the States after the horrendous week it has had.

Many economists also look at the four week average price of initial claims which is viewed as a better gauge of employment trends; this figure was up slightly by 3,250 from 486,750.

Despite the onslaught of poor data Germany continues to shine as German consumer morale increased for the third month running, hitting its highest level since last October.

An unexpected boost in German IFO business sentiment gave the Euro a lift yesterday. The data showed sentiment at a three year high, hitting 106.7 versus a forecast level of 105.5 and reaffirming the positive data flow from Germany over the past month.

However, Irish woes continued with Standard & Poor’s, the ratings agency, downgrading their debt to AA- with a negative outlook.

The huge cost of supporting the Irish banking system will push debt towards 113 per cent of GDP according the S&P estimates, well above the Eurozone average putting increasing demands on the Celtic tiger’s public finances and creating serious headwinds for economic growth.

Irish ministers were understandably furious, but the fear is the austerity measures designed to reduce the government budget deficit may make the job harder because of increasing unemployment and depressing tax revenues.

This fear, applicable to the other indebted Eurozone nations, is once again hanging over the Euro and is allowing Sterling and the Dollar to regain lost ground against it.

Sales of previously owned US homes dropped more than expected in July to their lowest pace in 15 years implying further loss of momentum in the States economic recovery.  The record drop of 27.2% from June equates to an annual rate of 3.83 million units which is the lowest level since May 1995 and June’s sales pace was revised down to a 5.26million-unit pace.

Markets had been anticipating a tumble of around 12% and so were shocked with the magnitude of this figure.

The US Dollar dropped significantly against the JPY following the news to a new 15-year low of around 83.60.

This prompted more verbal intervention from Tokyo but made little impact however as investors continue to sell USDJPY and are now focusing on the all time lows of 79.75 from 1995.

Investors ploughed money into government bonds, driving down the implied cost of borrowing to record lows in Britain and Germany.  The UK 10 year gilt yield fell to 2.88% which is even lower than that of March 2009  when the BoE announced that it would buy billions of gilts under its quantitative easing scheme.

US 10 treasury yields broke below 2.5%.  Oil followed suit and fell below $72 a barrel yesterday, down for a fifth day after weak US economic data spread gloom about the ability of the US, oils top consumer, to work through record stocks.

These ripples of doubt ran across the globe and caused equities to close down; Britain’s top share index closed lower with UK banks, miners and energy stocks bearing the brunt of the sell-off.  The FTSE ended down 78.89 points (1.5%) at 5,155.95 which is its lowest close since 20th July and unwound the gains of 0.8% which we had seen on Monday.

The newest member of the Bank of England’s interest rate setting Monetary Policy Committee hit the headlines this morning.Britain faces “significant” risk of a fresh slump into recession according to Dr Martin Weale, who said it would be “foolish” to rule out the possibility of a double-dip downturn. He also thought the Banks central outlook on growth could be too optimistic in light of the fiscal cuts currently being implemented.

The BoE forecast is for growth of about 2.8% in 2011 and 3.2% in 2012. Sterling has dropped over a cent against the dollar following the news and has traded as low as 1.5371.

M&A activity in the US, helped lift sentiment yesterday, unfortunately this did not last for long and both main stock indexes closed marginally down on the day.

There is little economic news again today so focus is likely to remain on the existing home sales in the US which is out this afternoon at 15:00. Figures are expected to show that sales of existing US homes fell to an annual rate of 4.67million in July from 5.37 million in June.

Reports today suggest FX analysts are the most pessimistic on the Pound since May 2009, predicting the Chancellor’s cuts will eat into economic growth, the already soft economic recovery is forecast to slow causing Sterling to fall back against both the Dollar and Euro. Median estimates suggest the Pound will drop 8 per cent against the Euro by year end as the recent bullish UK data starts to deteriorate.

The US Dollar rose sharply on Friday against the Euro, Sterling, Aussie and Canadian dollar on the back of risk aversion, while safe haven currencies such as CHF and JPY strengthened against the dollar.

The Fed is perceived by the markets to be in a holding pattern until further directional economic data is released. Weakness in global equities carried through to European markets sending major indices lower while US stocks are lower as the sell off continued.

The Euro fell against a basket of currencies on Friday and remains on the defensive this morning as comments by a senior ECB official fuelled expectations for liquidity to remain a concern for the single currency.

ECB Governing Council member Axel Weber told Bloomberg in an interview published on Friday it would be “wise” to extend unlimited liquidity to banks past the end of 2010. The Euro was further hit after the US Federal Reserve said the US and global economic recovery was losing steam, striking a nerve with investors.

The euro zone is seeing an increasing split not only in banking but in the economy in general. While the euro zone economy improved in the second quarter with Germany setting the tone, southern Europe recorded much more muted growth.

Market analysts believe the ECB may have little option but to keep flooding the money market with cash to help banks and governments in the EU.

Gilts opened lower and Sterling remained on the back foot on Thursday morning ahead of UK Public finances and UK retail sales.The market continues to be concerned about public sector debt so any poor data was expected to see the market react abruptly as investor’s fear the UK government will struggle to meet its target for narrowing the deficit this year.

Gold benefited yesterday as investors flocked to safety. Gold looks set to climb higher and closed yesterday up at $1235.40. Conversely, Brent Crude Oil slumped by 1% to close at $74.40 as uncertainty in the US may signal lower demand.

However, unexpectedly, retail sales actually rose three times faster then had been predicted in July. The Office for National Statistics said retail sales rose 1.1% on the month, the strongest growth since February 2010 and well above analyst forecasts for a 0.4 % rise.

On the year, retail sales rose 1.3 %, again above forecasts of 0.6 %. There was also a sharp improvement in Public Finances mainly driven by strong growth in tax receipts.

The Treasury were quick to react after seeming concerned that this figure would be interpreted as more positive for future budget forecasts and they announced that their figures were still in line with the Office for Budget Responsibility full forecast.

Sterling strengthened off the back of these figures and moved 1% higher against the Dollar and 0.5% against the Euro.

Sterling is trading up 50 points after the release of the Bank of England minutes showed one member, Andrew Sentance, voted to start the withdrawal of the exceptional monetary stimulus. This is the third straight meeting that Sentance has been the lone dissenting voice calling for a 25 basis point increase in the banks base rate.

He argued that the economic recovery is gaining momentum and the Bank needed to act to make sure inflation expectations are not allowed to deviate from current levels due to the current inflation rate stuck stubbornly above target.

Traders have taken this as a positive sign for the UK economy and the Pound now has just broken through 1.56 against the Dollar and 1.21 against the Euro.

The Euro regained ground against the US Dollar as Ireland’s 2014 and 2020 bond auctions largely passed without incident.

Spreads were already tightening ahead of the auction, and final bid-to-cover ratios of 5.4 and 2.4 respectively showed that demand remains firm.

Spain also sold 5.5 billion euros of 12- and 18- month bills at lower yields than in previous auctions in July. We wait to see if ECB intervention was the main reason for the strong demand.

The European data picture was less rosy, however, as the ZEW Economic Sentiment survey was much lower than expected at 14.0 (consensus. 20.0), though the current situation index was firm at 44.3 (cons. 24.0).

In contrast to the UK inflation figures falling yesterday eurozone inflation yesterday hit a 20 month high eu data has shown.
Annual inflation in the 16-nation bloc rose to 1.7% in July, up from 1.4% in June and the highest rate since November 2008, Eurostat said.

The figure was boosted by more expensive fuel costs for transport, and higher alcohol and tobacco prices.

Across all 27 nations in the European Union, prices were up 2.1% in July, compared with a rise of 1.9% in June.

Some countries – Finland, Greece, Spain, Portugal and Romania – raised their rates of VAT in July, which also helped to push prices higher.

On a month-on-month basis, prices in the eurozone fell 0.3% in July, and in the wider EU fell 0.2%.

UK inflation eased to 3.1% in July from 3.2% in June, the third month in a row that prices have risen more slowly than expected.
However, the Consumer Price Index (CPI) is still well above the Bank of England’s 2% target rate.

The Retail Prices Index (RPI) slowed to 4.8% from 5% in June, the Office for National Statistics said.  Sales signs Summer sales helped to push down prices, analysts said

The governor of the Bank of England will now have to write to the chancellor of the exchequer explaining why inflation is still above target.

The July inflation figures are watched particularly closely as they are used to set rail fare increases for the following year.

The changes affect regulated rail fares, which include long-distance off-peak journeys. This comes after some fares fell at the start of 2010, because RPI last July was -1.4%.

The main factor behind the drop in the inflation rate in July was a fall in transport costs, and in particular the prices of second hand cars and fuel.

Other factors included falls in the price of clothing and footwear.  These offset rises in cost of food and non alcoholic drinks.

Core inflation – which ignores volatile energy and food prices and is closely watched by economists – fell to 2.6% to 3.1%.

Last week, the Bank said it expected inflation to remain higher than forecast in the coming months, largely due to the rise in VAT to 20% in January.

The Bank’s governor, Mervyn King, said inflation was likely to fall back below the Bank’s 2% target in 2012.