Japan was dealt the biggest blow yet from the unfolding global financial crisis when the yen surged to a 13-year high Friday against the U.S. dollar and spiked against other major currencies.

The jump darkens earnings prospects for Japan's major exporters and threatens to drag the world's No. 2 economy into a recession.

The yen rose 7.4 per cent to as high as 90.89 yen to the U.S. dollar on Friday, its highest level since August 1995, on worries about the U.S. economy and as panicky investors unwound speculative yen carry-trades. The yen is borrowed at low interest rates in such trades, then used to fund investments in other currencies with higher yields.

Just last week, the U.S. dollar was above 100 yen.

In addition Friday, the yen rose against the euro and other European currencies as hedge funds and other investors rapidly began to unwind yen-carry trades.

When investors rushed to unload such investments amid near-panic, they were forced to buy back the yen, boosting its value, said Yasunari Ueno, economist at Mizuho Securities Co. in Tokyo.

Currency traders also nervously sold the dollar Friday in reaction to poor U.S. employment data released a day earlier that fanned speculation the U.S. Federal Reserve might cut interest rates, which would likely weaken the dollar further.

News that Sony slashed its earnings forecast the day before only added to investors' alarm, helping send the Nikkei benchmark stock index plunging 9.6 per cent to 7,649.08, the lowest since May 2003.

"The situation is a meltdown, and investors' faith is getting annihilated," said Yasunari Ueno, economist at Mizuho Securities Co. in Tokyo.

Demand concerns

While Japan's banks and financial firms have been largely immune to the woes that have hit the U.S. and European financial industry, there's plenty of concern that the country's manufacturers will get hit by shrinking consumer demand for flat-panel TVs, automobiles and digital cameras.

Now with the yen's appreciation, Toyota Motor Corp., Honda Motor Co., and other exporters are likely to see even less income when they convert their overseas earnings back to yen. Sony, for example, makes about 80 per cent of its sales overseas.