Dollar falls to record low against yen

In yet another blow to Japan's contracting economy, the dollar tumbled to a 13-year low against the yen Friday on investor dismay over the U.S. Senate's rejection of a bailout for the ailing American auto industry.

The dollar's fall to as low as ¥88.12 - the lowest since August 1995 - puts additional pressure on Japan's exporters, whose overseas earnings shrink as the dollar weakens against the yen. Already, major manufacturers like Toyota and Sony have slashed earnings forecasts amid waning global consumer demand, and Sony and Sharp have announced job cuts.

News of the demise of the $14 billion auto industry bailout and the yen's surge together triggered a big afternoon sell-off on the Tokyo stock market and once again underscored Japan's vulnerability to foreign exchange volatility.

The dollar later recovered to above 90 yen, but remained under the ¥91.43 mark from late Thursday. The benchmark Nikkei 225 stock average shed 5.6% to 8,235.87.

Alarmed, Japanese authorities warned that Tokyo might intervene in the currency market to buy dollars if the yen fails to cool off.

A senior financial ministry official described foreign exchange fluctuations as "too volatile," according to Kyodo news agency. "We will closely monitor the situation in the market and take appropriate actions," Kyodo quoted the unnamed official as saying.

Japan's export-oriented economy is inextricably tied to the U.S., and investors have been closely following the political developments in Washington.

"The automobile sector is a fundamental industry for both the U.S. and Japan, and a failure would be a major blow to Japan as well," said Nagayuki Yamagishi, an equities strategist at Mitsubishi UFJ Securities in Tokyo.

The rescue package sought by Detroit's ailing automakers was earlier approved by the House of Representatives but unraveled in the Senate. Bipartisan talks broke down over Republican demands that the unions agree to steep wage cuts by 2009 to bring their pay into line with U.S. plants of Japanese carmakers.

The breakdown left the fate of the auto industry -- and the 3 million jobs it touches -- in limbo at a time of growing economic turmoil. General Motors Corp. and Chrysler LLC have said they could be weeks from collapse.

The yen's surge comes days after Japan said its economy -- the world's second-largest -- fell into a deeper recession in the third quarter than first thought. The economy shrank at an annual pace of 1.8% in the July-September period, compared with its original estimate of a 0.4% contraction.

Companies are feeling the pain. Earlier this week, Sony Corp. announced plans to slash 8,000 jobs around the world, or about 5 percent of its global work force in a bid to bolster its bottom line. The consumer electronics giant recently lowered its full-year earnings projection to 150 billion yen ($1.5 billion), down 59% from the previous year.

Toyota has also cut its net profit forecast for the year ending March 2009 to 550 billion yen ($5.5 billion), a third of the previous year's earnings.

The dollar has fallen about 20% against the yen this year and could be headed lower if the Federal Reserve cuts interest rates again and investors flee for higher-yielding currencies, analysts said.