In early deals on Friday, the yen advanced against its major counterparts despite reports showed that Japan's consumer prices stalled in February and retail sales tumbled the most in seven years, suggesting the economy was edging toward deflation. The yen rose to a 2-day high against the pound.

Consumer prices in Japan posted little or no change for the year to February. The government reported that its core consumer price index was unchanged in February from one year earlier, while the overall CPI was down 0.1 percent on year. The data showed overall inflation was down 0.3 percent compared to one month earlier.

The information triggered warnings from analysts that Japan faces deflation, but Finance Minister Kaoru Yosano reacted Early Friday saying it was too early to conclude that deflation was already occurring. I believe it is too early to describe the 0.1 percent decline as deflation, Yosano told reporters in Tokyo.

Another report showed that retail sales in Japan plummeted by 5.8 percent in February when compared to a year earlier. The decline was the sharpest in 7 years and the 5th straight month of lower retail sales.

An unprecedented drop in exports is forcing companies to fire workers and cut wages, weakening household spending and pushing the economy closer to its worst slump in the postwar era. With the benchmark interest rate already at 0.1 percent, the Bank of Japan has little scope to stop prices from falling.

Central bank Governor Masaaki Shirakawa said this week that core prices are on the verge of falling and policy makers are committed to preventing the economy from sliding into a deflationary spiral.

Japan's currency also strengthened today on speculation domestic companies are bringing home overseas earnings before the end of the financial year on March 31. This in turn prompted some investors to take profits from recent strong gainers such as the Australian dollar after its jump to a near five-month peak earlier this week.

Growing stability in stock markets had encouraged investors to buy riskier and higher-yielding currencies this month, propelling the Aussie 10 percent higher versus the yen. The New Zealand dollar had been another beneficiary of such moves after government yields rose in a sign that investors were reining in expectations for lower rates.

On the other hand, the yen had been battered due to views that Japan could be the slowest among major economies to recover from recession after a slew of dire economic data.

Policymakers around the world have been struggling to stimulate growth, cutting interest rates to close to zero in many big economies, increasing infrastructure spending and buying assets from troubled banks and companies to pump more money into the system.

The U.S. economy, the world's biggest, shrank at its fastest pace since 1982 in the fourth quarter, data showed yesterday. But the headline figure of a 6.3 percent contraction was slightly better than the consensus forecast of a 6.6 percent decline.

Against the currencies of US and Europe, the yen climbed to 97.72 and 132.69 during early deals on Friday. If the Japanese currency moves up further, it may likely target 97.1 against the dollar and 131 against the euro. The dollar-yen and the euro-yen pairs were worth 98.76 and 133.60, respectively at yesterday's close.

In early trading on Friday, the yen rose to 86.97 against the Swiss franc. This may be compared to Thursday's close of 87.65. On the upside, 86.1 is seen as the next target level for the Japanese currency.

The yen jumped to a 2-day high of 141.29 against the pound in early trading on Friday. The next upside target level for the yen is seen at 140.4. At Thursday's New York session close, the pound-yen pair was quoted at 142.81.

The final fourth quarter GDP reports from France and UK, Italian and the Euro-zone industrial orders report for January are expected to influence trading in the upcoming hours.

Turning to the US, the Bureau of Economic Analysis is due to release its personal income & outlays report for February. Economists estimate the report, which is due out at 8:30 am ET, to show that personal income fell 0.1% during the month. On the other hand, personal spending is expected to have risen 0.3% in the month.

The final reading of the University of Michigan's consumer sentiment index for March is due to be released at 10 am ET. The report is expected to show that the consumer sentiment index edge down to 56 from the mid-month reading of 56.6.

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