The U-S dollar jumped to a 50-month high against the Japanese yen on Monday.
It was in response to encouraging U-S economic figures and an American official's opposition to using foreign exchange rates as a trade lever.
Analysts say the dollar will soon break the 125-yen landmark and is likely continue higher.
The dollar was trading at 124-point-seven yen in Tokyo late Monday afternoon, up one- point-one-four yen from late Friday.
In Monday's trading, the currency ranged between 124-point-two-five and 125 yen, its highest level since February 1993.
Traders said Japanese life insurers and banks bought American dollars heavily after remarks on Friday by U-S Treasury Secretary Robert Rubin.
He reassured the market that the U-S was not likely to push for a weaker dollar to help correct the U-S trade deficit.
Tokyo stocks dropped, with the Tokyo Stock Price Index of all issues down one-point- zero-nine percent.
Traders said shares in brokerage houses, banks and construction companies continued to be battered by worries over the bad loan problems of some financial institutions.
Stocks to gain value included pharmaceuticals and blue chips such as Sony, T-D-K and Honda Motor, which benefit from the yen's weakness against the dollar.
Analysts say the dollar should break the 125-yen mark soon.
"I think clearly 125 is a big sticker number, and investors are going to be very cautious to break through it. However, the underlying economics is very simple and very straightforward, and that is you're getting a yield of close to seven percent by investing in United States assets -- here in Japan you get a yield of only two percent, and that five percent difference is exactly what's going to drive capital outside of Japan into the United States and is soon going to force the dollar to break through 125."
SUPER CAPTION: Jesper Koll, vice-president, J.P. Morgan Securities Asia Limited
The dollar's surge was softened by the release of Japanese current-account data showing an unexpectedly large trade surplus, prompting some selling of the U-S currency.
But analysts say the fundamentals are in place for a major correction of the dollar-yen exchange rate for the foreseeable future.
The reason, they say, is simple.
"That is, the yen is coming from an extremely over-valued situation. The yen-dollar at 80 a year and a half ago, that was clearly an extraordinary depressed level of the dollar. And currently what we are getting by moving back towards 130 is a normalisation of exchange rates that certainly is justified by the fact that American assets are very attractive for Japanese institutions."
SUPER CAPTION: Jesper Koll, ViCe-President, J.P. Morgan Securities Asia Ltd.
The weakening yen is fuelling a surge in Japanese exports, as Japanese products become relatively cheaper.
The Japanese government said Monday that the surplus in Japan's broadest measure of trade rose in February for the second consecutive month, climbing 15-point-four percent from the same month a year ago.
That was above expectations, confirming that the surplus was widening after nearly a year and a half of declines.
The current surplus is now about one-point-five percent of Japan's gross domestic product.
Analysts say that while the weak yen will continue to fuel Japanese exports and widen the trade imbalance, the gap will be somewhat offset as the strengthening Japanese economy leads to more consumption of imports.
SUPER CAPTION: Jesper Koll, vice-president, J.P. Morgan Securities Asia Ltd.
Higher interest rates tend to make a currency more attractive to investors.
You can license this story through AP Archive: http://www.aparchive.com/metadata/youtube/d340eba703311c2f943e10e5587961de
Find out more about AP Archive: http://www.aparchive.com/HowWeWork