The yen struck a record low versus the euro and fell against the dollar on Friday after soft Japanese consumer price data suggested that the Bank of Japan could wait until 2007 to next raise interest rates.
But the yen later rebounded, partly as Japanese government bonds trimmed much of their gains after the data did nothing to change the outlook for the BoJ to press ahead with higher rates.
The yen also recovered after Japan's top financial diplomat told Reuters that he does not expect the yen to weaken further given Japan's healthy economic fundamentals, echoing comments from earlier in the week.
The nationwide core consumer price index in September climbed 0.2 percent from a year earlier, a touch below expectations for a 0.3 percent increase and slowing from a 0.3 percent rise in August. "It looks like the market got ahead of itself regarding the rate outlook," said a forex trader at a Japanese securities house.
"The market is going to wait for the BoJ's economic outlook report next week to get a better idea of whether a rate rise before year-end is still on the cards."
The BoJ's semi-annual outlook report on the economy and rates, which outlines the central bank's forecasts and broader policy outlook, is due on Tuesday.
The euro hit a record high of 150.80 yen on electronic trading platform EBS before pulling back to 150.30 yen, little changed from late US trade on Thursday.
The dollar climbed to 118.73 yen before paring gains to trade 118.40 yen largely unchanged from levels in late New York trade. The tame CPI reading also helded to push sterling to an eight-year high of 224.34 yen at one point. The euro was a tad higher on the day at $1.2698 after earlier rising to a three-week peak of $1.2715 on EBS.
The euro showed little reaction to comments by European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo, who said monetary policy cannot offset short-term changes in inflation from shocks to the economy such as changes in oil prices. He was speaking at a symposium in Osaka, western Japan.
The yen got a slight boost after Hiroshi Watanabe, vice finance minister for international affairs, said he does not expect the yen to weaken further given Japan's healthy economic fundamentals.
Asked whether he was talking about yen weakness against the dollar or the euro, Watanabe said: "It's the same thing." Speculation that the BoJ could raise rates before the end of December had been brewing ahead of the CPI figures, prompted after BoJ Governor Toshihiko Fukui said earlier this month that he could not rule out such a possibility.
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