The yen climbed on Monday, cheered by solid capital spending data that made some dealers think twice about betting Japanese rates may not rise again this year, a possibility which has weighed on the yen in the past two weeks.
The yen has struggled due to soft data on consumer prices and industrial output, which pushed it to a record low against the euro last week, but it got a reprieve on Monday after data showed Japanese firms increased capital spending by 16.6 percent in the April-June quarter compared with a year earlier.
Another factor supporting the yen was an enormous build-up in short positions in the currency, suggesting that the yen could get a lift if traders decide to unwind positions.
"The dollar has stalled, and today's data was fairly strong, so this could be an opportunity to pull back on the short yen positions that have been piling up," said a trader at a US brokerage in Tokyo.
The dollar traded around 116.40 yen, down 0.50 percent from around 117.10 yen in late US trading on Friday. It fell as far as around 116.35 yen, pulling away from a six-week high of 117.50 yen hit on electronic trading platform EBS last Thursday.
The yen edged up 0.3 percent against the euro to 149.75 yen from around 150.30 yen in late US trading on Friday and off a record high of 150.73 yen struck on Thursday on EBS.
The yen rose on some crosses, climbing around half a percent against the Canadian dollar to 105.35 yen after touching a 14-year low around 106.30 yen last week.
It traded around 0.40 percent higher against sterling and the Swiss franc pulling away from eight-year troughs hit against both currencies in the past week.
Traders said that the market could be gearing up for a short-covering rally in the yen after currency speculators upped bets against the yen to record highs last week, with net short yen positions rising to 88,329 contracts worth $9.46 billion.
Trading activity was light ahead of a Labour Day holiday in the United States on Monday.
The euro inched up 0.2 percent against the dollar at $1.2860. Dealers said the dollar looked vulnerable against the euro after US jobs data on Friday failed to bolster expectations for a Federal Reserve rate rise at its policy meeting this month.
The dollar may also dip lower against the yen this week if comments by Bank of Japan Governor Toshihiko Fukui revive expectations for a BOJ rate rise in the coming months. "I wonder if it is proper to conclude that there will be no rate rise this year," said Kikuko Takeda, currency strategist at Bank of Tokyo-Mitsubishi UFJ.
"I think people should keep in mind the possibility this week that Fukui could set off a correction against all the excitement that took place based on the CPI," Takeda said. Fukui is due to speak on Friday after a two-day BoJ policy meeting. The BoJ is widely expected to keep rates unchanged at 0.25 percent this week. Data released on Friday showed that the US economy generated 128,000 jobs in August, barely above median expectations of 120,000.
A Reuters poll taken after the release of the jobs data showed that just one out of 21 US primary dealers expect the Federal Reserve to raise interest rates at its September 20 meeting, after the central bank held rates steady at 5.25 percent in August, breaking a string of 17 consecutive rate increases.
By comparison, many market players expect the European Central Bank to raise interest rates two more times by the end of the year, to 3.5 percent, from 3.0 percent now.