The dollar fell against the yen on Thursday as expectations faded of the Bank of Japan delivering the radical stimulus package some had expected this week, and after the US Federal Reserve stopped short of flagging a near-term rate rise.

Japan's prime minister unveiled a surprisingly large 28 trillion yen ($265 billion) stimulus package on Wednesday, putting pressure on the central bank to match it with aggressive monetary easing and fuelling speculation that unconventional policies like “helicopter money” - giving cash directly to businesses and consumers - might be on the cards.

But sources told Reuters earlier on Thursday that the government is planning direct fiscal spending of 7 trillion yen to help fund the stimulus package which, at just a quarter of the total package, could disappoint some market players bracing for bigger outlays given the headline figure.

The dollar fell as much as 0.9 per cent to 104.48 yen.

“People were thinking that the larger the fiscal stimulus package, the more likely that the government would have to coordinate with the BOJ and that would increase the likelihood of some form of helicopter-money-type announcement tomorrow," said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman, from London.

“But the reality is that the BOJ won't be making that kind of announcement ... The market was too optimistic in expecting more aggressive easing from Japan, and those expectations are being pared back.”

Strategists say the yen could be in for volatile trading on Friday, and the dollar might even test the 2 1/2-year low of 99 yen in the wake of Britain's vote to exit the European Union.

“Investors will be closely watching not just the statement, but (BOJ Governor Haruhiko) Kuroda's press conference after the meeting ends, for clues to future policy,” said Kumiko Ishikawa, senior FX analyst at Gaitame.Com Research Institute in Tokyo.

A Citi survey of its clients and financial institutions earlier this month showed 80 per cent expected the dollar to fall more than 3 per cent against the yen if the BOJ stands pat on Friday and does not signal any action in September. More than 30 per cent think the drop would be more than 4 per cent.

The Fed, meanwhile, had said on Wednesday after its two-day policy meeting that it was less worried about possible shocks to the US economy, suggesting that a hike as early as September was not out of the question though not signalling it clearly.

The dollar index, which tracks the US unit against a basket of six major rivals, slipped 0.7 per cent to a two-week low of 96.343. That put it on track for its biggest one-day fall in eight weeks.

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