Mixed messages from the US administration have helped Japan's currency touch new lows.

US Treasury Secretary Paul O'Neill, in Tokyo for talks on the failing Japanese economy, said that it was up to the markets to decide the value of the yen.

"Exchange rate modification can do nothing to fix a mountain of non-performing loans or to improve underlying rates of productivity," Mr O'Neill said.

"Therefore I think for Japan's important problems, this subject is beside the point,"

The comments, which followed a meeting with Japanese Finance Minister Masajuro Shiokawa, were interpreted as offering US support for a weakening of the yen, which dropped to a three-year low of 134.35 against the dollar in London trading on Tuesday.

The yen stood at 134.28 to the dollar at 1300 GMT.

On the way down

With Japan, suffering deflation and a bad debt hangover, locked in its third recession in a decade, the yen has been steadily sliding for weeks.

Asian neighbours such as China and South Korea have voiced concerns over the weakening of the region's most important currency, and leading Japanese figures have publicly denied that the slide is being encouraged to boost the economy.

"Japan itself has no intention to pursue a weak yen intentionally as an economic policy measure," Mr Shiokawa said on Tuesday.

But privately many senior figures are thought to believe that the yen's fall is the most favourable outcome of a dire situation.

A weak yen means hard-pressed exporters can continue to sell abroad, even if consumers at home have stopped buying, observers have said.

The US has opposed this view.

On 21 January John Taylor, the US treasury undersecretary, warned that any benefits of a weaker yen would be only temporary.

And Secretary of State Colin Powell gas reiterated Bush administration hopes that Japan should once again become a "growth engine", despite its shrinking economy and fractured finances.