A massive surge in the yen exchange rate with the US dollar triggered a wave of selling on the Tokyo stock exchange, hitting blue chip exporters and sending the benchmark Nikkei index down to a two-week low.

The soaring yen, said Tokyo forex traders, is currently the global financial system’s most accurate barometer of risk aversion – the higher it climbs, the worse sentiment is in the world’s financial centres. The fear that is currently driving the yen higher, said dealers, is renewed concern that the US banking system bailout is insufficient.

Those fears were stoked by rumours that Japan’s second largest bank, Mizuho, may be preparing a huge $3 billion capital-raising effort, in yet another sign that even the best-capitalised banks are still struggling in the credit crisis.

The yen rose to the Y95 zone against the greenback. Cameron Umetsu, an economist at Nomura, recently said that the dollar-yen rate had fallen well into the “discomfort zone” for Japanese exporters, urging investors to recall that the average break-even exchange rate pegged by the Japanese Cabinet Office’s annual survey of exporters came in at Y104.82 for the current financial year and Y102 for 2009.

Worries surrounding the soaring yen were amplified by a flood of terrible economic numbers from around the region, including wholesale price data from Japan itself which suggested that the world’s second biggest economy has slumped back into the nightmare of deflation.

Elsewhere in Asia, the deep overnight plunge on Wall Street and a massive drop in Chinese industrial output weighed heavily on sentiment, knocking 6.6 per cent off the Hang Seng and more than 5 per cent from South Korea’s Kospi Index. China’s industrial production fell to its lowest level since 2001, prompting economists at RBS to describe the release as a “shock figure”.

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