The yen rose across the board on Tuesday, hitting a two-year high against the euro, after an economic adviser to Japan's Prime Minister Shinzo Abe indicated that the currency might have fallen too far and needed to retrace some of its losses. Koichi Hamada said on Monday that the yen's level of around 120 per dollar was very weak and that 105 yen to the dollar would be more appropriate.
The yen was also helped by the Bank of Japan's signal on Monday that the benefits of its stimulus programme were broadening, dampening talk of more near-term easing.
Japanese Economics Minister Akira Amari said on Tuesday he would not comment on foreign exchange levels.
The dollar fell 0.35 percent against the yen to 119.65 yen, while the euro lost 0.4 percent to trade at 126.40, having hit a two-year low of 126.08 earlier in the European session.
"Hamada's comments lead to speculation that the Japanese government is uncomfortable with rapid yen weakness," Nomura currency strategist Yujiro Goto said. "In the short term, it may slow down the yen's weakness against the dollar, but against the euro, we expect it to strengthen."
Goto said Japanese government bond yields above German Bund yields made yen investments more attractive compared to the euro assets. That was driving long term investors such as sovereign funds and central banks to gradually shift their portfolios towards the yen.
"We are expecting the euro to drop to 125 yen," Goto said.
The euro was flat against the dollar ahead of US retail sales data later in the day. It was last trading at $1.0565, not far from last month's 12-year low of $1.0457. The euro also hit a 2-1/2 month low against the Swiss franc of 1.0297 francs and a 4-1/2 month trough against the Norwegian crown.
Weighing on the euro was a Financial Times report that Athens was preparing for a debt default if it did not reach a deal with its creditors by the end of the month. Greece denied the report, saying negotiations were proceeding "swiftly".
"Overall, the position with Greece is now becoming more critical, in our view, and is set to put the euro under increasing pressure," Morgan Stanley said in a note. "A move below $1.0460 March lows would open the way for a decline towards the $1.0200 area initially."