The yen rose sharply from an earlier two-week low against the dollar after the Bank of Japan scrapped its five-year-old ultra-easy monetary policy and said the economy was recovering steadily.
The yen initially fell, Tokyo stocks rallied and Japanese government bonds eased a touch as the BoJ said it would keep short-term interest rates near zero.
But the yen reversed course in European trade as investors warmed to the view that the decision represents a first step towards an eventual interest rate rise, which money markets expect late this year.
It was also boosted by comments from BoJ Governor Toshihiko Fukui who said it would be theoretically possible to drain the excess liquidity in just three months.
"The yen briefly fell but it later went up because Fukui made bullish comments in his news conference," said Hidetoshi Honda, currency strategist at Mizuho Corporate Bank in London.
"Originally the market thought it would take 6 months to drain liquidity but he said it would be three months. This is faster than market expectations and the BoJ would prepare for a rate rise after this."
By 1240 GMT, the dollar had fallen to 117.31 yen, down half a percent, after hitting a two-week high of 118.31 in Asian trading. The yen was also around a one-week high versus sterling at 203.74.
The euro was down 0.45 percent at 139.88 yen. The single currency was hugging a familiar range against the dollar at $1.1926, broadly steady on the day.
The markets shrugged off data showing that German industrial production fell 0.1 percent on the month in January versus a forecast for a 1.1 percent rise.
In its monthly bulletin, published on Thursday, the European Central Bank said inflationary risks are to the upside in the eurozone and monetary policy remains accommodative.
The ECB raised rates to 2.50 percent this month and is expected to hike at least twice more this year.
ECB Governing Council member Axel Weber told a German parliamentary committee on Wednesday there were still price risks in the eurozone, adding that the growth outlook was favourable.
The Bank of England left rates on hold as expected at 4.50 percent on Thursday. It did not issue a statement. Sterling was little changed on the day at $1.7385 and 68.59 pence per euro.
The BoJ said it would no longer set a target for the amount of surplus funds in the money market, but instead follow a more conventional tactic of guiding short-term rates - pinned near zero for several years. It also said it would also adopt an inflation reference rate of zero to 2 percent.
Benchmark euro/yen futures are almost fully pricing in two hikes in the overnight call rate, to 0.5 percent by year-end. However even at that level it would be far below rates of other major economies and thus the yen is likely to remain popular as a funding currency for now.
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