Japan's Nikkei share average gained 1.9 percent on Tuesday and the yen weakened to a 33-month low against the dollar after a U.S.Treasury official seemed to voice support for Japan's aggressive policies to combat deflation and bolster growth.
The U.S. Under Secretary for the Treasury for International Affairs, Lael Brainard, said that that U.S. supported proposals by the Bank of Japan (BoJ) to introduce anti-deflation policies that weaken the yen.
Speaking at a news conference in Washington, Brainard added that the G7 was committed to"market-determined" exchange rates "except in rare circumstances where excess volatility or disorderly movements might warrant cooperation."
The G7 said in a statement on Tuesday that it will consult closely on actions in foreign exchange markets.
Her comments appear to have eased market concerns about U.S. opposition to further yen weakness. The Japanese currency fell to around 94.20 against the dollar in early trade on Tuesday, just below Monday's level of 94.42, which was the weakest since May 2010.
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The comments have acted as a green light for speculators to resume selling yen", Lee Hardman, currency analyst at the Bank of Tokyo-Mitsubishi UFJ said in a note on Tuesday.
"With the yen's overvaluation almost fully reversed according to our valuation models, further yen weakness which drives the currency deeper into undervalued territory is naturally more likely to draw international criticism…as Japan's main trading partners lose competitiveness, " Hardman added.
The Bank of Japan announced in January that it would buy unlimited amounts of assets in 2014 and double its inflation target to 2 percent to combat a stagnant economy.
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The announcement prompted an acceleration in the fall in the yen - which has declined 13 percent against the dollar since December 2012. Japan's new Prime Minister Shinzo Abe has pressured the central bank to pursue aggressive monetary easing. Over the weekend, Japan's finance minister said in a speech that he wants to see the stock market rise 17 percent to 13,000 by the end of March.
However,there has been international criticism that the BoJ's policies were tantamount to waging a "currency war," and the issue is set to be high on the agenda at this Friday's G20 meeting in Moscow.
Hardman forecast that the yen was likely to remain under downward pressure ahead of the government's nomination of a new governor and deputy governors at the BoJ, who are expected to mark a shift to more aggressive easing.