The US dollar rose briefly above 100 yen in Asian trading on Friday, the first time it had done so since early November 2008.


The news boosted shares in Japanese exporters, with the likes of Sony and Toyota Motor closing higher.

The dollar later fell to 99.50 yen amid nervousness ahead of the US jobless figures due later on Friday.

In the first three months of 2009, the dollar had its best quarterly performance against the yen since 2001.

"The yen selling was not sustainable before the US jobs data release," said a dealer at a Japanese brokerage.

"Opinion may be tilted towards the yen weakening in the longer term, but the market would first like to see this major event through."

The yen has been falling in value as a result of weak Japanese economic data and speculation that Japanese investors are planning to move funds overseas in the new financial year.

Janet Yellen, president of the San Francisco Fed, said that the economy needs 'urgent' action to avoid even deeper recession.

KOHALA COAST, Hawaii (Reuters) -- The United States is not facing a downturn as deep as the Great Depression, but many of the current dynamics are similar, driving the need for "urgent, aggressive action" to stop a deepening recession, a top Federal Reserve policy-maker said Friday.



The dynamics of the financial markets as well as the global nature of the current downturn both have similarities to the depression of the 1930s, Janet Yellen, president of the San Francisco Federal Reserve Bank, told reporters after a speech to the 128th Assembly for Bank Directors meeting on the Kohala Coast of Hawaii.

"The economy is in the midst of a downward spiral, and that calls for strong policy responses," Yellen said. "Government policies to restore confidence, create jobs by boosting the demand for goods and services, and improve the functioning of our financial system represent our main hope of avoiding a very severe economic contraction."

Yellen is a voting member of the policy-setting Federal Open Market Committee in 2009.

Yellen, speaking on the same day the government announced the biggest job losses in 34 years, said now is not the time to dither or debate endlessly on the shape of fiscal stimulus.

"It is critical that decisions on these matters be made on a timely basis," she said.

The U.S. jobless rate hit 7.6 percent in January, the Labor Department said on Friday. Yellen said most economists see the rate peaking in the 8 percent or 9 percent range, still short of the peak of the 1981-82 recession and far below the 20 percent plus rate of the Great Depression.

The U.S. Senate on Friday evening reached a deal on a $780 million stimulus package to stem the recession. The Senate is expected to vote on the measure soon, and if it passes then lawmakers would have to resolve differences between the Senate bill and an $819 billion version passed by the House of Representatives last week.
'No end in sight'

Yellen said consumer spending had been stopped in its tracks as American households have hunkered down and acted to boost their savings in response to spiraling unemployment and a "staggering" $10 trillion loss of household wealth.

Yellen said that "unfortunately, there is no end in sight" to the housing woes that triggered the current recession, with inventories of unsold homes remaining high and private mortgage credit still scarce.

Meanwhile, a yawning output gap in the U.S. economy suggests "inflation will remain, for some time, below levels that are consistent with price stability."

Still, Yellen said outright deflation, while possible, was less of a worry to her than rising "real" interest rates now that nominal rates are already as low as they can go, inflation is falling, and the economy is still contracting.

The U.S. inflation rate, both headline and the core rate excluding volatile food and energy costs, is likely to fall below 1 percent in 2009, she said.

"The committee does not regard it as desirable to allow inflation to fall to very low levels," she said, referring to the policy-setting FOMC.

Yellen said the FOMC's recent comments that it intends to keep short-term interest rates low for a considerable period are one way it can bolster the economy now that it has reached the "zero bound" on the fed funds rate.
Banks have to unclog their balance sheets.

Yellen said past banking crises have shown the importance of removing bad assets from banks' balance sheets, and looked for a proposal on that score from the Obama administration soon, as a prerequisite to restoring stability to the financial system and, ultimately, the economy.

Treasury Secretary Timothy Geithner is due on Monday to outline a "comprehensive plan" to stabilize the financial system in a speech set for noon Eastern time.

"As long as hard-to-value, troubled assets clog their balance sheets, banks find it difficult to attract private capital and to focus on new lending," Yellen said.

She urged bank directors to act in ways that would help restore economic growth.

"My hope is that, while avoiding imprudent practices that would put your institution at risk, you will also resist extreme risk averse, since it would undermine efforts to get the economy going," she said.

As the Fed continues to cross "traditional boundaries" in providing liquidity to various corners of the credit markets, Yellen said she was "absolutely open" to the idea of the central bank buying long-term Treasuries if it would help the overall functioning of the credit market.

Meanwhile, Yellen told reporters the Fed needed to fight back against the notion that its liquidity efforts would inevitably lead to higher inflation and higher interest rates, terming the notion "ludicrous."

WASHINGTON — The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers.

But with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.

The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.

Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases.

As envisioned, the Treasury would put up about 5 percent of the money that a company would use for lending and private investors would put up perhaps 20 times that much by buying bonds issued by the new program.

Despite the mind-boggling amount of money that Congress has authorized the Treasury to spend — $350 billion immediately, and another $350 billion that Congress would approve under a fast-track procedure — Mr. Paulson is running short of money and time.

The news that the government will not buy soured mortgage assets, along with a string of poor corporate earnings, disheartened investors on Wednesday, sending the markets down for a third straight day this week. The Dow Jones industrial average fell 411.30 points, or 4.7 percent, to close at 8,282.66.

The Treasury has already committed about $290 billion. It has allocated $125 billion to the nation’s nine biggest banks and investment banks; another $125 billion for publicly traded regional banks; and $40 billion to expand the existing bailout of American International Group, the insurance conglomerate that collapsed in September.

Mr. Paulson alluded to the consumer credit plan vaguely in a news conference on Wednesday, and some Fed officials cautioned that they had seen few details. But Treasury officials said such a plan would give them the biggest bang for the buck and might be enacted within several weeks.

Mr. Paulson conceded that he had scrapped the plan he originally sold to Congress in September, which was to have the Treasury Department buy hundreds of billions of dollars worth of illiquid mortgage-backed securities in order to free up banks to resume normal lending.

The program is still called the Troubled Asset Relief Program, or TARP, but it will not buy troubled assets. “Our assessment at this time is that this is not the most effective way to use TARP funds,” Mr. Paulson said.

Instead, Treasury will step up its program of injecting capital directly into banks and, for the first time, expand it to include financial companies that are not federally regulated banks or thrifts.

Mr. Paulson made it clear he would not use Treasury money to help bail out the automobile industry, rebuffing pleas from General Motors, Ford and Chrysler as well as from top House and Senate Democrats.

But Mr. Paulson left open the prospect of providing backdoor support to the car companies by offering to recapitalize nonbank financial companies like GE Capital and CIT Financial, and the financing subsidiaries of Ford, Chrysler and G.M.

House Democrats are already drafting legislation that would provide Detroit’s Big Three with an additional $25 billion, on top of $25 billion in low-interest loans that are supposed to be used for retooling factories for energy-efficient cars.

“The consequences of a collapse of the American automobile industry would be particularly troublesome,” said Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. Mr. Frank said the assistance would come with strict conditions aimed at protecting taxpayers.

Some Republican lawmakers have already objected, saying the effort would amount to throwing good money after bad. But the White House on Wednesday left the door open to a legislative compromise with Congress.

“I know the automakers are important to the United States,” Mr. Paulson said. “We care about the automobile industry.” But he cautioned that “my focus is on the financial sector — getting credit going, getting lending going.”

White House and Treasury officials have been devising policy on the fly for months now, as what began as a panic over losses on subprime mortgages broadened into a crisis that wreaked havoc on Wall Street, at major commercial banks and in the broader economy itself.

In September, Mr. Paulson went to Congress and urgently pressed for authority to spend as much as $700 billion to unclog the nation’s financial pipelines by buying up unsellable securities from banks and other financial institutions.

But by the time Congress approved the bailout law in early October, Mr. Paulson and the chairman of the Federal Reserve, Ben S. Bernanke, were already shifting to a strategy he had actually opposed: buying equity stakes directly in American banks, a move that was reminiscent of European-style nationalization.

As recently as a few days ago, Treasury officials insisted that they still intended to buy up the troubled assets. But by late October, it had become clear that Plan A had become little more than a sideshow.

“Illiquid assets looked like the way to go,” Mr. Paulson told reporters at a news conference on Wednesday. But as economic and financial conditions declined so rapidly, he said, that he had to change gears. “I will never apologize for changing the approach and the strategy when the facts change,” he said.

The change in strategy has had only limited impact on the frozen credit markets. The biggest improvement has been in the willingness of banks to lend to each other, a change that largely caused by the willingness of both the United States and European governments to guarantee bank deposits and interbank loans.

But the market for commercial debt backed by consumer and business loans has remained at a near standstill since Lehman Brothers, one of Wall Street’s leading investment banks, collapsed in September.

Borrowing costs for credit card issuers are at least five percentage points higher than they were before the credit crisis began. Financing costs for automobile lenders are even higher. Even student loans that are guaranteed by the federal government have been difficult to finance.

“You have a market that is frozen,” said Alex Roever, an analyst at JPMorgan Chase.

To stretch his resources, Mr. Paulson told reporters he was examining ideas to have private investors contribute capital alongside Treasury.

Mr. Paulson also made it clear he did not want to use bailout money to refinance the mortgages of homeowners who are in danger of losing their homes to foreclosure. Democratic lawmakers and the chairman of the Federal Deposit Insurance Corporation, Sheila C. Bair, have been calling for the Treasury to spend $40 billion in a broad mortgage refinancing program.

As envisioned by Treasury officials, the Federal Reserve would set up a new special-purpose lending entity, which would lend cash to investors or companies that put up collateral in the form of consumer loans. The Fed might lend up to 80 percent of the value of those loans, providing a cushion for taxpayers against losses.

The Treasury would contribute 5 percent to 10 percent of the money to finance the lending. But the Fed would raise most of the money by selling what is known as nonrecourse commercial paper to investors.

Treasury officials said the plan would allow them to leverage the government’s money by as much as 20 to 1, meaning that the Treasury would provide 5 percent of the money and investors would provide 95 percent. Using $50 billion in money from the government rescue program, they said, could thus underwrite $1 trillion worth of lending for consumer loans.

Such an arrangement would bear a similarity to exactly the highly leveraged, and eventually disastrous, special-investment vehicles that banks like Citigroup created in countless numbers to hold, among other things, securities backed by subprime mortgages.

Although the Treasury would contribute only a small share of the money for such a program, analysts said the plan would only overcome investor fears if the Treasury or the Federal Reserve provided some kind of backstop against losses. If that were to be the case, taxpayers would be indirectly liable for the entire volume of lending.

Fed officials appeared to be taken aback by Mr. Paulson’s public reference to the idea, and cautioned that it was still in early development.

“Both the structure and the parameters are under discussion and development,” said Michele A. Smith, a spokeswoman for the Fed.