*Yen rises vs dollar, euro as Nikkei slides 6.9 percent
*Risk aversion underpins yen
*Worries over global recession, credit markets remain
*Uncertainty over U.S. auto industry fans credit jitters
*Bank of Japan starts two-day policy meeting
By Kaori Kaneko
TOKYO, Nov 20 (Reuters) - Risk aversion kept the yen and the dollar firm on Thursday as global recession worries and credit jitters fuelled by uncertainty over the struggling U.S. auto industry led investors to cut risky assets.
Yen-buying gained steam in the afternoon as a slide in the Nikkei share average accelerated, with Japan's benchmark index tumbling 6.9 percent.
Equities are regarded as a barometer of investor risk appetite and their declines can trigger unwinding of carry trades, which involve selling low-yielding currencies like the yen to invest in higher-yielding currencies and assets.
"Around the time when the Nikkei fell more than 400 points, yen-buying accelerated," said Kwang-ja Kim, deputy general manager at Shinsei Bank.
"With recent weak U.S. economic data, uncertainties about rescue measures for U.S. automakers and worries about a further fall in the Dow, demand for the Japanese currency will likely increase further on risk aversion," she said.
The dollar fell 0.5 percent from late U.S. trading on Wednesday to 95.21 yen on trading platform EBS.
The euro slipped 0.4 percent to 118.98 yen. Against the dollar, the single currency was steady at $1.2495.
U.S. and European stocks fell to their lowest levels in 5-½ years on Wednesday as prospects faded for a Washington bailout of the auto industry and data showed U.S. consumer prices dropped at a record pace in October.
The dollar may be vulnerable against the yen due to deepening concerns about U.S. corporate earnings and expectations the Federal Reserve will cut interest rates from the already low 1 percent at a meeting next month, traders said.
But the dollar was seen as likely to be supported against other currencies due to general risk aversion triggered by falling stocks and growing uncertainty over whether U.S. automakers, including General Motors, will win emergency government loans.
U.S. CARMAKERS, INTEREST RATES
The top three U.S. carmakers have warned that bankruptcy for one or more of them would lead to massive job cuts.
"The focus is on GM's fate, and mounting credit market worries could accelerate investors' moves to repatriate overseas investments, supporting the dollar," said Hiroshi Yoshida, a trader at Shinkin Central Bank.
"The continuing risk aversion means investors will sell assets for cash, and such position unwinding will also help strengthen the yen against a broad range of currencies," he said.
Yoshida said the yen's rise was unlikely to be as sharp as last month, and an immediate challenge of the 90 yen mark was unlikely in the near term.
"But the yen is poised for a gradual uptrend and a rise beyond 90 yen is possible over the medium term," he said.
Data released on Thursday showed that Japan's exports logged their biggest annual decline in seven years in October, as the global economic slowdown takes its toll on overseas demand for Japanese goods.
Market reaction was muted as recent data had already shown Japan, along with the euro zone, entered a recession in the third quarter.
Market players expect the Bank of Japan to mull more steps to soothe frazzled money markets at a two-day policy meeting that ends on Friday. But the central bank is expected to keep interest rates steady at 0.30 percent.
Analysts said the outcome of the BOJ meeting may not offer much incentive to the market as the focus is more on moves by the Fed and central banks in Europe.
Minutes on Wednesday from the Fed's meeting last month added to the bleak global economic view, as the central bank said U.S. economic data in the run-up to the December meeting would show significant weakness and could well mean that another rate cut may be needed. (Additional reporting by Chikako Mogi; Editing by Chris Gallagher)