The dollar took one of its worst drubblings in years in Toyko yesterday as the Bank of Japan bowed out of the market and announced it had abandoned its effort to support the U.S. currency.
The dollar fell nearly 3 1/2 yen during heavy trading, opening at 225 yen and closing at 221.60.
The unusually sharp decline was attributed to the absence of buying by the government bank which had been absorbing large amounts of dollars all week in a vain attempt to turn the tide.
In New York, the dollar showed some firming against the yen in late trading yesterday. It moved fractionally in Europe in quiet trading.
After the exchange closed yesterday afternoon, the bank's governor, Teiichiro Morinaga, told reporters it would no longer intervene in the market and would let supply and demand determine the value of the yen and other currencies.
He acknowledged that the central bank's large-scale intervention this week had not stopped the dollar's slide.
The dollar has slumped to a new low every day this week, continuing a decline that has reduced its value by more than 25 per cent in the past year.
Kyodo news service reported that strong speculative pressures hit the dollar again, as it has for the past few weeks. Much of it has come from Japan's big export companies who are unloading dollars for fear they will become worth even less in the coming days.
Japan's big trade surplus and the large U.S. trade deficit are the under-lying reasons for the dollar's fall and the yen's rise in the past year. Since there are no signs that that relationship will turn around anytime soon, market experts believe the dollar will continue to fall on world currency markets in Tokyo.
The government has intervened heavily in the market to keep the yen from appreciating further against the dollar. Its main long-range fear is that a higher valued yen makes Japanese products more expensive in world markets and could cause havoc for the country's export-oriented economy.
This week's drastic appreciation of the yen will add new pressures on premier Takeo Fukuda to try to push the United States into strong measures to halt the dollar's decline when he meets with President Carter next month.
He is also expected to take the issue up with the chairman of Carter's Council of Economic Advisers, Charies Schultze, who comes to Tokyo for financial discussions in mid-April.
While the experts agree the trade imbalance is the basic cause, Japan has made some sudden gestures lately to try to halt the trend or at least slow it down.
Last weekend, the government announced yet another plan to stimulate the economy quickly so that it can absorb more foreign imports and reduce the trade gap.Most of the elements in the plan were old and familiar and when the currency market opened on Monday the government's hopes of a turnaround were dashed.
Then the Bank of Japan rushed in with what appeared to be the biggest intervention of the year, using its yen reserves to soak up the dollars. Japanese newspapers estimated that on Tuesday the bank's purchases amounted to nearly $800 million.
The defensive buying may have slowed the dollar's decline but failed to stop it and the bank made only minor interventions yesterday.
One reason for the bank's reversal is that economists became worried that putting too much money too quickly into the country's financial system might trigger a faster-paced round of inflation, Morinaga said yesterday that he was concerned about the increase in liquidity caused by his bank's heavy dollar-buying.
[TEXT OMITTED FROM SOURCES] gress fails to enact energy legislation within a month.
"The market is acting as if the duties had already been imposed," Sinclair said. "As a result some demand has been created by traders covering short positions in the dollars."
But he said there will be no lasting improvement in the dollar's position until energy legislation is enacted.
In Europe the dollar was mixed in generally quiet trading, but dealers were encouraged that its slight gains were in relation to the strong West German mark and Seiss franc.
In Frankfurt the dollar closed at 2.0280 marks compared with 2.02775 Tuesday. In Zurich it firmed to 1.87875 Swiss francs from Tuesday's 1.8785.
The dollar was also higher in London, where the pound closed at $1.8820 compared with $1.8830.
The price of gold fell $2.25 an ounce. In Zurich it closed at $181.375 an ounce, compared with Tuesday's $183.625 and in London it closed at $181.125, compared with $183.375 Tuesday. Dealers in London attributed the drop to profit-taking, along with a firming tendency in the dollar.