CONTINUED strength in the yen could fuel inflation in Hongkong, local economists have warned. The US dollar closed at 116.78 yen in Tokyo yesterday, its lowest-ever finish there but above the intra-day low of 115.88 in New York on Monday. In Europe, the dollar was quoted around 116.80 yen yesterday, well up from Monday's European finish of 116.08 yen. While many Hongkong experts are dismissing the latest dollar plunge against the yen as heavily speculative, regional economists expect a re-run towards the end of the year as Japan lumbers on to the recovery path. At this point, a stronger yen against the dollar based on fundamentals would start to exert upward pressure on Hongkong's inflation rate as the cost of cars, machinery and consumer goods escalated. Mr Alfred Wong, a senior economist at Wardley Investment Services, said: ''Because imports from Japan constitute 16 per cent of Hongkong's total imports, the sharp appreciation of the yen may have an impact on Hongkong's inflation. ''But I don't know when the products' prices will be feeding through. Probably it will be over a long period of time. ''Japanese exporters prefer holding prices in US dollars rather than letting them feed through in US dollar terms, so the actual impact is a bit difficult to assess. But certainly the pressure is upwards on Hongkong inflation.'' Inflation in Hongkong last month rose back to double-digit levels for the first time since last February, a ''blip'' blamed by the Government on the early Lunar New Year festival. A senior economist at Hongkong Bank, Mr Chan Kwok-kei, noting that China and Taiwan were the major sources of goods to the territory, said: ''If the yen continues to remain at strong levels for a long time - three to four months, half a year - I think that would most likely cause higher inflation.'' Thornton Management (Asia) group economist Andrew Hunt does not believe the strong yen will trigger price rises in Japanese goods. He believes the cash-strapped companies are so eager to off-load stock that they would rather lose profit margin than customers. He said: ''If the yen keeps going like this, the Japanese authorities will have to intervene to hold it down because the economy is so weak at the moment.'' A senior economist at Schroders Securities, Mr Mo Yik-ko, is looking for the dollar to return to 120 yen as early as next week. He said: ''The US economy is in recovery whereas Japan is still very sluggish, so changes in economic growth should support the dollar more than the yen. ''I would expect the yen to strengthen towards the end of the year when Japan's economy starts to recover, or there are signs it is on the path to recovery. ''A stronger yen will fire inflation here, but that will probably not take place until towards the end of the year when the yen will be strong on a more fully fledged recovery in Japan.'' But he expects the Group of Seven (G7) meeting at the weekend to continue to back a strong yen. A regional economist at Jardine Fleming Broking, Mr Ranjan Pal, reckons the impact on Hongkong's inflation rate will be minimal, saying domestic elements hold far more sway than imported inflation. For Hongkong exports to steal the march over Japanese goods to third markets, the numbers are smaller and the impact likewise. Crosby Securities analyst Ray Ferris said: ''As far as Hongkong goes, you can say the Hongkong dollar effectively equals the US dollar, so dollar weakness against the yen is generally speaking beneficial to our export price competitiveness. ''Although Hongkong products have not become cheaper in currency terms, they are a lot cheaper relative to Japanese products. And as Hongkong, generally speaking, tends to be a competitor, so the yen appreciations should benefit us.'' The dollar opened steadier in Europe yesterday as the foreign exchange market showed some reluctance to push the yen much higher. But dealers said it might be just a brief, technical respite for the dollar before another yen ascent. ''The dollar's got a top-heavy feel to it while the yen's got more supporters than the Brazilian football team,'' said one bank dealer in London. The dollar fell to 1.6247 marks from Monday's close of 1.6295 as investors chose to dump some dollars and the mark benefited from uncertainties in Europe's currency grid. The strong mark meant renewed tensions in the European Exchange Rate Mechanism, where the Spanish peseta and the Portuguese escudo felt pressure despite supportive central bank intervention on Monday.