The yen edged up against the dollar on Monday on firmer Tokyo stock prices, but the market was thin due to holidays overseas and trod on eggshells as it awaited the outcome of a hostage crisis in Iraq.
Boosted by the Nikkei average's climb above the key 12,000 level, the yen rose as high as 106.10 per dollar up around 0.3 percent from late-Friday levels in Tokyo, before settling around 106.25/30.
The Nikkei ended trade up 1.22 percent at 12,042.70.
Meanwhile, three Japanese remain in the custody of militants four days after the group released a video of the hostages and vowed to "burn them alive" if Japanese troops did not leave Iraq by Sunday.
Traders were bracing for heightened market sensitivity towards geopolitical issues regardless of how the crisis played out.
"It's not like the terrorism threat is going to end for Japan when the hostages are returned. In a way, you have to wonder if it's okay that stocks are up and the yen is firm," said Hideaki Furumaya, a forex manager at Trust and Custody Services Bank.
News of the kidnapping pushed the yen down to around 106.78 per dollar on Friday, on worries that a mishandling of the crisis could damage support for Prime Minister Junichiro Koizumi, whose ruling Liberal Democratic Party faces an Upper House election in July.
Market movements were expected to remain limited on Monday while the fate of the captives was unclear.
"Unless we have a large surprise today, range-bound behaviour is going to continue," said Naomi Fink, senior currency analyst at BNP Paribas.
Some analysts said the yen would be cornered for the most part, given that traders had already positioned for the worst.
"The market had factored in a worst-case scenario on Friday, so both gains and losses will probably be limited should the crisis continue," said Furumaya of Trust and Custody Services.
London and New York markets were closed on Friday for the Easter holiday, while most European markets are also shut on Monday.
Data released earlier on Monday pointed to strengthening Japanese fundamentals.
Thanks to strong exports to China and other global markets, Japan's current account surplus in February was up 46.2 percent from a year earlier at 2.157 trillion yen ($20.30 billion), beating a median forecast of 2.0 trillion yen in a Reuters poll.
"The fact that current account figures outperformed expectations means that Japan can probably weather a little more yen strength without it damaging the economy," said Fink of Paribas.
Still, the market refused to budge on the figures.
The euro was trading at $1.2058/61 slightly weaker than late-Friday levels. Against the Japanese currency it was quoted at 128.12/17 yen compared with 128.58/71.
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