The Finance Ministry beefed up its arsenal for combating the yen's strength through market intervention and the Bank of Japan said it would continue driving short-term interest rates to near zero while watching out for adverse effects from the strong yen. Despite a jump by the dollar on Friday to more than three-month highs against the yen, the still-strong Japanese currency inflames deflationary pressures and erodes the yen value of Japanese companies' overseas earnings.

"There is no change in our view that an excessive yen appreciation is unfavourable for economic recovery," said top finance bureaucrat Nobuaki Usui. The ministry proposed raising the ceiling on the issuance of bills used for foreign exchange interventions by 10 trillion yen ($93.63 billion) in the coming fiscal year to 59 trillion yen. Japan won a statement of renewed concern from its Group of Seven partners at a January 22 meeting about the possible effect of the yen's rise on the Japanese and world economies.

In return, the BOJ had to promise anew that it will keep interest rates at zero - where they have been for almost a year - to support the economy's crawl out of its worst postwar downturn. In the Osaka area, home to many large exporters, firms are strongly concerned about the yen's trajectory although many firms expect higher profits in the half year to March through cost cuts and strong overseas demand, said BOJ Osaka branch manager Minoru Masubuchi.

BOJ Governor Masaru Hayami, reiterating that the central bank's zero interest rate policy is on hold for now, told the bank's branch managers a careful watch was needed on the effects of the high yen since last summer on the economy and prices. The central bank has said it will maintain its zero rate policy until deflation fears subside. "It is appropriate for the BOJ to maintain its zero interest-rate policy, since Japan's economy has not reached a situation in which deflationary concerns have been dispelled," Hayami said.

Hayami is stuck between his desire to nudge rates up a bit as soon as conditions warrant and government pressure to maintain, or even loosen, monetary policy. On fiscal policy, Prime Minister Keizo Obuchi reiterated to parliament that the economy is improving but remains weak, vowing not to let up on government spending until recovery is firmly in place.

Data released on Monday showed the economy's continued dependence on government largesse. Orders received by 50 major construction companies slumped 13.1 percent in December from a year earlier, with public-sector orders plunging 32 percent, the Construction Ministry said.