JAPAN’S Ministry of Finance has lost more than £40 billion in the past financial year trying to bet against currency speculators, The Times has learnt.

Cabinet Office insiders admitted yesterday that the currency losses have spiralled out of control, after a renewed attempt by the Finance Ministry to prop up the dollar and talk down the value of the yen.

The insiders told The Times that losses in a special ministry account that holds the Government’s intervention reserves are expected to soar to Y7.8 trillion (£40 billion) by the end of the financial year. This month the Government has already spent a record sum trying to prevent the yen from rising too high against the dollar, a movement that would hurt Japan’s all-important exporters, on whose prosperity all hopes of an economic recovery are pinned.

However, in trading in Tokyo yesterday it was clear that Japanese exporters were also preventing the massive currency intervention programme from succeeding. As the yen fell to Y107.50, a number of carmakers were understood to be dumping large amounts of their foreign-earned dollars on the market.

When the ministry’s huge losses are officially confirmed later this year, Junichiro Koizumi, the Prime Minister, will face pressure to prove that his controversial currency intervention strategy is working.

The battering to the ministry’s foreign exchange account arises because the department is selling its own currency for dollars. As the value of the greenback continues to plunge, so too does the value of the dollars that the Government has already purchased.

At the start of fiscal 2003, the ministry assumed an average exchange rate of Y121 to the dollar. That was revised up to Y115 in November. Last week the yen rose to just over Y105.

The special account’s paper losses will be realised once the ministry begins to unwind its huge holdings by selling dollars at these lower levels, in exchange for yen. However, currency analysts polled by The Times yesterday suggested that the outlook for the dollar/yen exchange rate looks set to favour a continued slide in the greenback. This means that Japan is likely to continue accruing vast paper losses.

One currency broker in Nomura, the Japanese securities house, said: “The (ministry) is like an intervention junkie at the moment. The effect of each shot of dollar buying is getting less and less, which means the shots have to be bigger and bigger. The odd shock move makes only a very temporary difference.”

Japanese monetary authorities have effectively confirmed to The Times that the losses will not deter them from trying to swing the currency markets. So far this year, the Bank of Japan (BoJ) has bought an estimated $20 billion and officials have assured markets that the intervention will continue.

In a surprise move yesterday, the BoJ eased monetary policy in what some economists said was an attempt to offset the failures of its intervention efforts. The central bank raised its liquidity target under its quantitative easing policy by Y3 trillion to a new range of Y30 trillion to Y35 trillion, a margin that gives the BoJ scope to help the finance ministry’s battle against the rising yen.

However, beyond that measure, analysts and BoJ sources have pointed out that Japan does not, in fact, have many policies to choose from, beyond more costly intervention. The BoJ has virtually no scope for serious monetary easing and Mr Koizumi’s structural reform programme has tied the ministry’s hands in piling on more fiscal spending.