The Japanese yen continued to strengthen spectacularly against the US dollar yesterday. This followed the dollar's steepest one-day fall in Tokyo in nearly 25 years on Wednesday. The yen last night stood at 115 to the dollar, compared to 130 on Tuesday.

The cause was growing optimism that massive funds would be injected into Japanese banks and concerns about a slowdown in the US economy, analysts said. Japanese investors finally started to sell dollars and buy yen, with the Japanese post office leading the way in selling US treasury bonds to purchase yen. Hedge funds and other investors sold as much as $3 billion dollars to pay back yen loans.

Tokyo traders were caught off guard. "It was a shock. We haven't seen this kind of move in something like 25 years," said Mr Kenneth Landon, chief foreign exchange strategist at Deutsche Bank.

The yen shot up after Japan's ruling Liberal Democratic Party (LDP), after months of prevarication, finally sent legislation to parliament to rescue troubled banks with public funds. The legislation would inject 10 trillion yen ($75 billion dollars) of public money into the banking system.

The Japanese media said on Wednesday the legislation would pass but LDP and opposition parties have not yet fully agreed on the bank Bills before parliament, a government spokesman cautioned yesterday. "We are increasing our efforts to elicit the understanding of the opposition," he said. "If the Bills are not passed quickly, it could have a big effect on the financial system. We must pass them somehow."

Opposition parties have expressed concern that the injection of funds to ailing banks could lead to an indiscriminate bailout of financial institutions. The LDP has 104 seats in the Upper House, far short of a majority in the 252-seat chamber.

The yen also surged due to the order given by Prime Minister Keizo Obuchi to his cabinet on Tuesday to prepare a major stimulus package. Among the measures being considered to encourage spending are "gift certificates" and longer holidays. Each of Japan's 125 million people will receive 30,000 yen ($258) in certificates valid for one year. The Lower House of parliament passed a Bill this week to create two three-day weekends with "Happy Mondays" to promote more travel in the year 2000.

Senior Finance Ministry official Haruhiko Kuroda said the yen was in an "autonomous reversal", adjusting from its "excessive" declines against the dollar. Some traders doubted that the yen's surge against the dollar could last because of Japan's current recession but did not expect a recovery in the dollar soon, citing a possible US rate cut and uncertainties over the future of US President Bill Clinton.

Some Asian currencies were pulled up by the Japanese yen.