Their thinking goes like this: if the yen gets strong enough, Japanese shares will fall sharply because of the impact on exporters, who become less competitive with the stronger currency. Foreign investors will then pull out of Japan, and the Japanese authorities will intervene in the foreign-exchange market to push the yen down. So the yen can't keep strengthening -- or so Japanese executives hope.

Still, the yen's strength is raising concerns in Tokyo. Its ascent "is much too fast," Osamu Watanabe, the top bureaucrat at the Ministry of International Trade and Industry, said Thursday. "We strongly hope for appropriate foreign-exchange steps from Japanese monetary authorities." A stronger yen hurts Japanese exporters, because it makes the dollars they earn overseas worth less in yen terms, and forces them to eitherraise prices or take a hit to their earnings.

Many companies aren't panicking yet. "I don't think there's that much energy [in the yen's rise]. The Japanese economy is still fragile - everyone knows that," said the managing director in Tokyo of a European investment bank. But, few thought the yen would strengthen even this much. In Tokyo Thursday, it traded at 108.65 to the dollar, the strongest level since January. In late afternoon New York trading, the dollar was fetching 109.13 yen.

Foreign investors are behind the yen's recent surge. They have been buying Japanese stocks in the belief that Japan's economy is on the verge of a recovery, and their demand for the currency needed to purchase those shares is strengthening the yen. In 1994 and 1995, the main factor in strengthening the yen was Japan's huge current-account surplus, which remains an underlying issue but is considered less directly responsible this time. A current account is a wide measure of trade of goods and services.

The eagerness offoreigners to invest in Japan, however, may have the perverse result of weakening the sector in which they have the most interest - exporters such as Sony Corp or Toyota Motor Co. Japanese officials such as MITI's Watanabe warn that if the yen gets any stronger, the recovery that foreigners are counting on will be endangered.

Investors are watching for signs of dollar-buying action to weaken the yen along the lines Watanabe hinted at, either by the Bank of Japan alone or in coordination with the US Federal Reserve. Cameron Umetsu, an economist at Warburg Dillon Read in Tokyo, thinks the central bank will jump in if stock prices suddenly tank, but there is no sign of that yet. The benchmark Nikkei stock average closed Thursday at 17631.25 points, down 0.96 per cent, but that is still 27 per cent above its level at the beginning of the year.