Long-term interest rates and the yen fell and stock prices jumped as the markets continued to respond to recent aggressive monetary easing measures by the Bank of Japan (BOJ). The central bank has driven a key overnight interest rate essentially to zero this week by flooding the money market with funds, and on Friday left the market with a surplus of 1.4 trillion yen ($11.3 billion).

Some of this liquidity has sloshed over into longer-term debt markets as investors bought long-term Japanese government bonds (JGBs), pushing prices up and yields down. "Long-term interest rates had been over two percent and were something of a worry," finance minister Kiichi Miyazawa said on Friday. "Yesterday they fell to around 1.5 per cent or 1.6 per cent as an indirect result (of the overnight rate falling to zero). That's not a bad thing."

The yieldon the benchmark 10-year JGB was down 0.07 percentage point in the early afternoon on Friday at 1.54 per cent.

Some cabinet members were less impressed with the BOJ's unprecedented action, which aims at reflating the economy. Farm minister Shoichi Nakagawa, a former banker, expressed doubts that the BOJ money would help the real economy.

But Economic Planning Agency chief Taichi Sakaiya said lower interest rates would help the recession-strapped economy by stimulating the housing sector and purchases of big-ticket consumer durables.

Sakaiya said falling interest rates would also be taken into account by the currency market, where, indeed the yen slid to a three-month low against the dollar.

The dollar climbed to 123.72 yen overnight on sentiment that the gap between US and Japanese interest rates will continue to widen, although it slipped back in Tokyo when finance ministry officials declined to welcome the fall explicitly.

"I am silently watching it," Miyazawa told a regular news conferenceregarding the dollar's overnight rally. Asked about the outlook for the currency, he said "There's no need to talk about that, and I should not talk about that."

A weaker yen generally helps the economy by making Japanese exports cheaper abroad and by inflating the yen value of Japanese companies' overseas earnings.

The yen's decline cheered the Tokyo stock market, where the benchmark Nikkei index was up more than 4 per cent by late afternoon.

Meanwhile, the government welcomed Thursday's requests by 15 major banks for 7.46 trillion yen in public funds to replenish their depleted capital.

Miyazawa said the recapitalisations would eventually help ease banks' tight-fisted lending policies, although not right away.

The EPA's Sakaiya predicted banks would forgive a large amount of bad loans after they receive the money at the end of this month.

"If this doesn't happen, then bankruptcies will rise, all employees of the bankrupt firms will be fired, leading to unemployment and social problems," Sakaiyasaid.

Faced with the worst national job situation in decades, cabinet members on Friday pledged to create 7,70,000 new jobs over the next two years, largely through deregulation measures and already announced steps such as support for expansion of Internet-related businesses.

Miyazawa expressed optimism that the Japanese economy can achieve the government's target of 0.5 per cent growth for the fiscal year starting on April 1.

This was despite a remark by the International Monetary Fund chief economist Michael Mussa on Wednesday that the institution was likely to revise its estimate of a 0.5 per cent contraction for Japan in calendar year 1999 to indicate an even greater decline.