Aug. 27 (Bloomberg) -- The yen rose for a third day against the euro in the longest stretch of gains since July on concern Chinese production curbs would slow economic recovery, fanning demand for the relative safety of Japan’s currency.

The currency gained versus major counterparts including the pound on speculation Japan’s exporters are repatriating earnings to take advantage of a new tax law. A government report today may show a faster contraction in the U.S. economy than previously estimated.

“We have talks from China cutting back expanding, trying to sort out the balance sheet and prevent too much reckless lending,” said Peter Frank, a London-based currency strategist at Societe Generale SA. “But domestic factors, like capital repatriation, are driving yen’s strength right now.”

The yen advanced 0.6 percent to 133.60 per euro at 7:35 a.m. in New York, from 134.36 yesterday. Japan’s currency climbed 0.6 percent to 93.70 per dollar after touching 93.38, the strongest level since July 22. The dollar was little changed at $1.4259 versus the euro, compared with $1.4255.

China’s cabinet said yesterday it’s studying restrictions on overcapacity in industries including steel and cement as policy makers seek to rein in investment growth fueled by a record credit expansion this year.

The Shanghai Composite Index fell 0.7 percent today. The Nikkei 225 Stock Average declined 1.6 percent. The MSCI World Index of stocks slid 0.1 percent.

Economic Reports

The yen also strengthened versus the euro as a Bloomberg News survey of economists showed Japans’ unemployment rose last month while consumer prices fell. The jobless figure may climb to 5.5 percent from 5.4 percent and consumer prices excluding fresh food may drop an unprecedented 2.2 percent, according to Bloomberg News surveys. Both reports are due tomorrow.

The U.S. government’s revised figures for second-quarter gross domestic product, due today, will show the economy shrank at a 1.5 percent annual rate, compared with the preliminary reading of a 1 percent contraction, according to the median forecast of another Bloomberg survey.

The dollar fell to a one-month low against the yen as the London interbank offered rate, or Libor, for three-month dollar loans dropped below that for equivalent-maturity yen loans for the first time in 16 years yesterday, according to BNP Paribas SA, France’s largest bank.

“At these levels there is little incentive to borrow in yen to fund investments” in higher-yielding assets, analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas, wrote in a research note yesterday. “The dollar-yen is likely to remain pressured.”

Borrowing Costs

Libor for three-month dollar loans fell to 0.36063 percent today. The three-month yen rate advanced to 0.39313 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against currencies of six major U.S. trading partners fell 0.1 percent to 78.578, from 78.661.

Japan’s government announced earlier this year that it would waive taxes on repatriated profits from April 1 to help support the economy. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings.

“One of the stories that’s been doing the rounds again this morning is that Japanese firms may be repatriating profits back to Japan ahead of fiscal half-year end because of the tax holiday,” said Ray Attrill, global research director at Forecast Ltd. in Sydney. “We could see dollar-yen down to 92-93 in the short term, but on a sort of three-month-plus view, we’re tipping it to be back above 100.”

Currency Integration

Japan’s opposition leader Yukio Hatoyama wrote in the New York Times that his nation should work with other Asian countries to create a single regional currency and bolster alliances to make it possible.

Asia should “aspire to move toward regional currency integration,” wrote Hatoyama, who polls indicate will become Japan’s prime minister after a national election on Aug. 30. “We must spare no effort to build the permanent security frameworks essential to underpinning” a single currency that “will likely take more than 10 years” to establish.

The pound slid for a seventh day against the euro, the longest run since January, to trade at 88.12 pence, compared with 87.72 pence. The U.K. currency also dropped to 151.64 yen after depreciating to 151.38, the lowest level since July 14. It declined 0.4 percent to $1.6186, from $1.6249 yesterday, when it touched $1.6160, the weakest level since July 13.

The average cost of a British home climbed 1.6 percent in August, the most since December 2006, Nationwide Building Society said today. Economists predicted an increase of 0.5 percent, according to the median of 17 forecasts in a Bloomberg News survey.

‘Dovish Rhetoric’

“Given the Bank of England’s outright dovish rhetoric, firm U.K. economic data should rather weigh on pound sentiment as positive economic news could fuel the discussion whether the bank has committed a policy error by raising quantitative easing,” Commerzbank AG analysts wrote in a report yesterday.

The Bank of England has cut its benchmark interest rate to 0.5 percent, allocated 175 billion pounds to buy bonds and is raising 220 billion pounds of debt through March 2010 to fund stimulus packages and bank bailouts.

To contact the reporters on this story: Anna Rascouet in London at arascouet@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

Last Updated: August 27, 2009 07:43 EDT