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SCMP Reporter

The yen continued to build momentum yesterday after the race for Japan's new prime minister was formally declared.

 Former chief cabinet secretary Seiroku Kajiyama and foreign minister Keizo Obuchi threw their hats into the ring in what analysts said was a contest which would result - whoever won - in much-needed economic and financial reforms.

 An unexpected candidacy was also announced late in the day by Health Minister Junichiro Koizumi.

 The yen jumped through the 139-yen barrier, peaking at 138.68 at one point yesterday, compared with the New York close of 139.9 on Thursday.

 The movement in the yen ended a week which had seen dramatic political turmoil after a poor showing by the ruling Liberal Democratic Party in the Upper House elections on Sunday, prompting Prime Minister Ryutaro Hashimoto to resign.

 The currency initially sank on the news but in a volatile week of trading ended up 1 per cent, cheering currencies throughout the region.

 Yesterday the yen continued to gain strength in Tokyo trade, but later fell back in Europe after the announcement of Mr Kajiyama's economic manifesto fell slightly short of expectations.

 Traders said the yen weakened to almost 140 at one stage yesterday, reaching 139.95, because Mr Kajiyama appeared to emphasise the need for banking reform more than tax cuts.

 The initial strength of the yen emerged after Mr Obuchi - seen as less reform-minded than Mr Kajiyama - called for a cut in corporate and personal income taxes by around six trillion yen (about HK$330.45 billion), a lowering of the top income tax rate and an extra budget of 10 trillion yen this financial year.

 Mr Kajiyama was equally forthright about the need for permanent tax cuts, but concentrated more on the reform of Japan's heavily indebted banking system.

 Traders said the difference between the candidates was a matter of degrees.

 'The market is looking for any small differences between the two, so they can trade off it,' one head of a dealing desk said.

 'There is nothing really new in any of this.'  Analysts said gains far beyond 138 yen were unlikely to take place until there was a clearer picture of the amount of support behind the various candidates.

 There is also some concern about the timing of any reforms. It is not expected that any of the tax changes proposed can take place before the end of the year, and some analysts pointed out there was some concern that Japan had not taken any steps to implement more far-reaching structural reforms.

 Mr Kajiyama said Japan needed permanent income-tax cuts and lower corporate tax rates but would not be drawn on how large the cuts would be or give any other details on fiscal measures.

 Mr Koizumi is best known for his plans to privatise the postal system and reduce the role of government.

 He is also known to have close connections with the Ministry of Finance, which some worry may make him less willing to be tough on the banking sector.



Leadership race sends yen higher