The yen surged to a two-week high against the dollar on Wednesday, after the head of the Bank of Japan said the currency was unlikely to fall further because it was already "very weak", prompting investors to trim huge bets against the yen.
Analysts said the comments suggest that the BoJ may have started the long process of preparing the market for a time when the Japanese economy will need less monetary stimulus.
The comments from Haruhiko Kuroda, made to a lower house financial affairs committee, lifted the yen from last week's 13-year trough of 125.86 per dollar JPY=.
Hit by the yen's advance and a euro boosted by rapidly rising European bond yields, the dollar slipped to a three-week low against a basket of major currencies of 94.330 .DXY.
In the minutes after Kuroda's comments, the dollar fell more than two yen to as low 122.50JPY=, its weakest since May 27. It was last down 1.3 percent at 122.82 JPY=, putting it on track for its biggest daily loss against the yen for six months.
"It looks like in the G7 meeting there was a lot of conversation about the speed of the dollar's rise as the Fed begins normalizing policy later this year," BMO Capital Markets' European head of FX policy, Stephen Gallo, said.
"As far as the Japanese are concerned, it's an effort on their part to prevent a rehash of 2013-2014 when growth slowed sharply despite, and possibly because, the yen weakened so rapidly."
The yen has fallen largely as a side effect of the BOJ's massive quantitative easing, aimed at overcoming deflation. Some Japanese policymakers have recently expressed concern about the yen's decline for fear this could raise import prices too quickly or become a source of trade friction.
Earlier, Kuroda had told Japanese lawmakers that the dollar may not necessarily rise versus the yen if the Federal Reserve raises interest rates as traders may have already priced the possibility of a rate hike into the market.
As 10-year German Bund yields topped 1 percent for the first time since September, narrowing the spread between them and the equivalent 10-year U.S. Treasury yields to its tightest in four months, the euro soared by 0.8 percent to a three-week peak of $1.1374EUR=.
Short-term market focus has turned again to Greece, which has entered a decisive phase this week in its talks with creditors to agree on a solution to its debt crisis.
"Failure to agree this week would likely make it difficult to have a smooth resolution before the end of June, partly because another extension of the program would require the approval of some national parliaments," Barclays strategists wrote.
Join the Conversation