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Japan's Fallout Over Trade Knocks Confidence in Economic Recovery

US threats of trade sanctions cause Nikkei to slump as yen rises, although Hosokawa downplays discord

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THE Japanese yen stayed strong against the United States dollar in Tokyo yesterday, as fallout continued from last Friday's trade summit between Prime Minister Morihiro Hosokawa and President Clinton. The two leaders' failure to conclude a bilateral trade agreement has cast a pall over Japan's incipient economic recovery.

Successful passage of political reform bills and cabinet approval of the 1994 budget boosted investor confidence through early February. The Tokyo Stock Exchange's Nikkei Index climbed back above the 20,000 level for the first time since last October. Last week, the Economic Planning Agency forecast 2.4 percent growth in real gross domestic product for fiscal year 1994.

With Mr. Hosokawa and Foreign Minister Tsutomu Hata in Washington to finalize trade agreements with the US, economic indicators were looking positive on Friday. But failure to conclude a US-Japan trade accord sent foreign exchange dealers back to their computer screens to face the specter of a trade war.

On Tuesday, the yen closed at 102.02 to the dollar, up 3.67 yen from Monday, and more than 8 yen from its pre-summit benchmark. Tuesday's rate was the dollar's lowest mark since the endaka (strong yen) crisis of August 1993. Only massive dollar-buying by the Bank of Japan drew the yen lower after touching 101.90 early in the morning.

The bank was active again in yesterday's quieter trading in Tokyo. The dollar closed up 1.13 at 103.15 yen, with the bank reportedly intervening but unable to tip the dollar above 104 yen.

Many dealers say the yen will resume its climb as Trade Representative Mickey Kantor and Laura D'Andrea Tyson, head of the Council of Economic Advisers, keep talking tough on Japan's $60 billion trade surplus with the US. On Tuesday, Mr. Kantor threatened to apply sanctions to imports of Japanese cellular phones.

Back in Japan, Hosokawa played down the dispute, insisting that he and Mr. Clinton had agreed to find ways to resolve the issue after a ``cooling off period.''

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