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What happened to a weak yen?

Akio Kon| Bloomberg| Getty Images

Many currency analysts anticipate the yen weakening to around 105 to 110 per U.S. dollar by year-end, but as the final quarter of the year gets into full-swing the chance of the currency hitting those estimates later than forecast are rising.

Japan's currency firmed to a one-month peak against the greenback this week around 97, up more than 6 percent from the 4-1/2 year low set in May.

The rebound in the yen is a worrying sign for Japan's policy makers who have been hoping a weak currency would underpin the economic recovery, fuel business sentiment and a rally in Japanese stocks. This in turn is seen encouraging companies to spend or increase wages to help spur spending in the world's third biggest economy.

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"Dollar/yen trade in recent weeks and months has been an exercise in frustration," Callum Henderson, global head of currency research at Standard Chartered Bank told CNBC.

Analysts say the trend for a weaker yen, which is down roughly 13 percent versus the dollar so far this year, remains intact given the outlook for continued aggressive monetary easing in Japan.

They add the currency has just been blown off course for now – partly because worries about the U.S. government shutdown and the looming debt-ceiling debate are driving jittery investors into the safe-haven yen.

(Watch more: Yen will remain rangebound: Pro)

"We recently moved our year-end dollar/yen forecasts lower, to 103 from 105 – but clearly U.S. events have overtaken the near-term outlook," said Emma Lawson, senior currency strategist at National Australia Bank.

"Debt ceiling fears are keeping the dollar subdued, but the fact is that Japan's fundamentals have not changed," she said.

(Read more: Gridlock raises fear of lengthy US shutdown)

Nizam Idris, head of fixed income and currencies at Macquarie bank, adds: "We have a year-end target of 105 for dollar/yen – we haven't reduced it, yet we do see a risk that this could be pushed out into next year."

Dollar/yen one-month chart

The yen weakened some 30 percent against the dollar between November last year and May, driven lower by a combination of aggressive monetary stimulus from the Bank of Japan (BOJ) and optimism about the government's radical economic policies to revive the world's third biggest economy.

But yen weakness, which provides Japanese exporters with a powerful boost and is central to Prime Minister Shinzo Abe's efforts to reflate the economy, has stalled in recent months.

(Read more: Shinzo Abe's letdown puts onus on Bank of Japan)

"The Bank of Japan (BOJ) could easily talk about further [quantitative easing], raising the pace of asset purchases for example, to weaken the currency," said Idris.

"That is the easy part, the other part is the global story which is working against the BOJ and strengthening the yen. So it is a bit more complicated," he added.

Tai Hui, chief Asia-Pacific strategist at JPMorgan Funds, said that unless the yen weakens further the Nikkei is unlikely to extend this year's stellar rally by much.

The blue-chip Nikkei stock index has soared 61 percent this year, easily making it the best performing major equity market globally.

"We have seen positive moves [in stocks] this year, but to continue that trend into 2014 we need the yen to weaken further," he said. "The risk environment just isn't helping Japan's course right now."

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC