London, June 11: The yen fell more than half a per cent to 2-1/2 week lows against the dollar and two week lows versus the euro on Monday as data suggested Japan was once again flirting with recession.

Japan’s economy contracted 0.2 per cent in the first three months of this year, compared with expectations of a 0.2 per cent rise. The figures raised fears that the economy is slipping into its fourth recession in a decade and pushed Japanese stocks down 1-1/2 per cent.

“The weaker-than-expected Japanese data has fuelled fears of a recession, hitting both the Nikkei stock index and the yen,” said Nick Stamenkovic, senior strategist at Nomura International in London.

“The market is worried about the deteriorating Japanese economy and this is taking a toll on the yen.” The yen weakened beyond 121.60 to the dollar, down over half a per cent on the day. It also weakened as far as 103.80 per euro, before paring losses, almost four yen below the five-month peaks set against the euro earlier this month.

The euro was marginally weaker against the dollar, just below $0.85, having shown a muted reaction to Friday’s rejection by Irish voters of the Nice treaty on European Union enlargement.

Meanwhile, sterling recovered almost one per cent from Friday’s 15-year lows against the dollar as newspaper reports dampened speculation over Britain’s early entry into the euro.

Japan’s GDP numbers showed business investment was slipping following a cooling in exports to key markets such as the United States and Asia, while consumer spending stalled and prices fell.

Capital spending fell 1.0 per cent while private consumption was unchanged on the quarter, which came as a surprise as analysts had predicted some strength.

“The GDP data were pretty horrible and sparked yen selling across the board,” said Jesper Dannesboe, chief foreign exchange strategist at Dresdner Kleinwort Benson. Traders said the weaker-than-expected growth data had put Japan’s economic fundamentals back in the spotlight, with all eyes now focused on how the data would affect the government’s economic assessment in its monthly economic report for June, due later this week.

Takashi Imai, the head of Japan’s most influential business group the Keidenren, said on Monday the Japanese economy could contract over the next two to three years.

But Bank of Japan governor Masaru Hayami sounded a calm note, saying the GDP data were within expectations and he saw no need for a further easing of the central bank’s ultra-loose monetary policy.

Japanese economics minister Heizo Takenaka also tried to put a positive spin on the numbers, saying he did not see a danger of a downward spiral but warned it would be difficult for Japan to meet the government’s 1.7 per cent growth target for the new fiscal year.

Sterling bounced off last week’s 15-year lows against the dollar, helped by a weekend press report that British chancellor Brown has urged new foreign secretary Jack Straw to curb his department’s enthusiasm for the UK’s early euro entry.

Straw is perceived as more of a euro sceptic than his predecessor at the foreign office, Mr Robin Cook.

-- Reuters