The yen rose broadly on Tuesday, pulling away from multi-year lows versus the dollar and euro after Japanese, South Korean and New Zealand officials raised concerns about the low-yielding currency's recent weakness.
That, coupled with falls in equity markets and concerns over US housing market problems feeding into its wider economy injected wariness into the wisdom of holding riskier carry trades funded by borrowing in the low-yielding yen.
Japanese finance minister Koji Omi told a news conference that it was important to be aware of the risks of acting one way, echoing Group of Seven warnings on one-way currency bets.
Concerns on carry trade risk were compounded by FX officials from South Korea and New Zealand who agreed they were worried about the adverse impact of the yen's weakness.
On top of that, the International Monetary Fund's chief economist said building global inflation pressures should provide room for the BOJ to raise interest rates, which in turn would gradually reduce the yen carry trade.
Omi's comments follow similar warnings from the Bank for International Settlements in its annual report on Sunday that there was "clearly something anomalous" about the yen's recent weakness.
"It's a combination of things really including Japanese officials raising concerns on the yen and a joint statement from South Korea and New Zealand," Calyon head of currency strategy Mitul Kotecha said.
"We're (also) seeing a slight increase in risk aversion...on the back of the hedge fund problem and fallout from subprime mortgages," he said, adding that there seemed to be a bit of a backlash from central banks against carry trades.
"This does point to some further short-term upside for the yen," he added. By 1140 GMT, the euro was down 0.4 percent versus the yen at 165.67, well way from a record high hit last week. The dollar was down 0.4 percent at 123.10.
The euro was flat on the day at $1.3457, while the dollar gained 0.1 percent to 1.2296 Swiss francs. The pan-European FTSEurofirst 300 stock index was down 0.3 percent.
The popularity of carry trades - borrowing funds in low-yielding currencies to buy higher-return assets - has been a driving factor in the yen's broad slide to a 20-year low versus the New Zealand dollar and a 15-year trough against the pound.
But it is the second time in the past few weeks that Omi has tweaked his usual comments on currencies at a regular news conference, having started to say earlier this month he was watching the market carefully.
Analysts and traders said the Ministry of Finance was unlikely to conduct any yen-buying intervention, and unless it did so further warnings would probably lose their effectiveness.
"The yen move is probably slightly exaggerated. Those remarks from Omi, on another day, if US financial markets weren't showing some slight nervousness, probably they wouldn't have had the impact on the yen that they have done," ING head of currency strategy Chris Turner said.
Looking ahead, investors will scrutinise US consumer confidence figures for June and new home sales for May, both due at 1400 GMT, for signs of whether problems in the housing market have fed into the wider economy.
Market players are waiting for Thursday when the Federal Reserve will wrap up a two-day policy meeting for pointers towards Fed thinking about the economy's health.
Signs of a rebound in US growth have led many investors to expect the Fed to keep rates at 5.25 percent rather than cutting them, helping the dollar recover from a record low against the euro and a 26-year trough versus the pound both hit in April.
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