The yen clawed back some of this week's losses in Asian trading on Wednesday, after it sank to 2-1/2-week lows reached this week as the prospects for more economic stimulus in Japan helped bolster risk sentiment.
The dollar slipped 0.5 per cent to 104.20 yen. On Tuesday, the greenback scaled a peak of 104.98 yen, its highest level since June 24. For the week, the dollar was still up about 3.6 per cent against the yen.
The euro fell 0.5 per cent to 115.26 yen but was still up about 3.7 per cent so far this week.
“There has been some profit-taking by people who were yen-short, and that led the yen to rise today,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo.
'Helicopter money' stimulus policy
Part of the yen's recent weakness was also due to some investors' hopes that former US Federal Reserve chair Ben Bernanke's meetings with Japanese leaders this week would herald the adoption of a “helicopter money” stimulus policy.
That term, coined by American economist Milton Friedman, was cited by Bernanke before he became Fed chairman in 2006, when talking about how central banks might finance government budgets as a way to fight deflation.
“Some investors were also hoping that 'helicopter money' was coming to Japan, but the chief cabinet secretary just explicitly said that was not going to happen, and the dollar came off," Sera said.
BOJ policy steps
The dollar hit its session low of 103.95 yen shortly after Chief Cabinet Secretary Yoshihide Suga told a news conference that the Bank of Japan will decide monetary policy steps based on factors such as market movements and the economic environment, and that it was not true that the government was considering “helicopter money''.
In addition to short-term profit-taking, rebounding equity markets have led investors to reduce their holdings of safe-haven assets like the yen, which had surged in the aftermath of Britain's shock vote last month to leave the European Union.
But some market participants caution against reading too much into this week's yen moves.
While the yen may ease further in the near term, a sustained drop against the dollar seems unlikely, said Daisuke Karakama, chief market economist at Mizuho Bank.
“I think these moves are nothing more than position squaring and will prove temporary,” Karakama said, referring to the yen's broad retreat this week.
Economic stimulus
Expectations of more economic stimulus in Japan have contributed to the recovery in risk sentiment.
Japanese Prime Minister Shinzo Abe on Tuesday told his economy minister to compile an economic stimulus package by the end of this month to revive a flagging economy.
Besides fiscal spending, there is also focus on whether Japan's central bank will expand its monetary stimulus at its policy meeting later this month, especially after Bernanke told Abe that the BOJ has steps left available to support the economy.
Against the dollar, the euro edged slightly up to$1.1064.
Sterling was 0.3 per cent higher at $1.3288, after climbing 1.9 percent on Tuesday.
The recently battered pound has enjoyed some relief this week as interior minister Theresa May's likely ascension to the job of British prime minister helped calm investors unnerved by Brexit and political turmoil.
For sterling, this week's main economic event is a Bank of England policy meeting on Thursday which markets expect will bring about a cut in interest rates to shield the economy from the immediate shock of the Brexit vote.