The currency market intervention was an ambitious move by Naoto Kan, Japan's prime minister [AFP]
Japan's central bank has intervened in currency markets, selling off holdings in yen in what is being viewed as an attempt to halt the currency's appreciation against the US dollar.
Wednesday's move was expected to boost Japan's exports and stop further economic stagnation.
Naoto Kan, the country's prime minister, said that the intervention had some effect and that the government was watching foreign-exchange movements.
The yen had "reached the stage where we could not leave it untouched. So, we intervened", Kan said.
The sell-off did appear to have had its desired effect, with the yen falling three per cent against the US dollar, to as low as 85.52 in trading on Wednesday.
The politically and economically risky intervention came a day after Kan reaffirmed his leadership with a victory in a ruling party election over Ichiro Ozawa, a powerful political rival considered by some as more likely than Kan to take tough action on the economy.
A weaker yen makes Japanese makes goods cheaper on international markets, so exporters support the government's intervention.
"We applaud the move by the government and the Bank of Japan to correct the yen's strength," Honda Motor Co, Japan's second largest car manufacturer, said in a statement.
Other countries, however, may not be so happy with Japan's intervention. A lower yen, bolstering exports, means other countries will have to deal with Japanese imports, which could hurt their domestic production.
In the past, China has been criticised for artifically keeping its currency low, flooding other markets with Chinese products and creating what some see as global imbalances.
"Unilateral actions are not the appropriate way to deal with global imbalances," Jean-Claude Juncker, chair of the Eurogroup of euro zone finance ministers, said when asked about Japan's intervention.
Yoshihiko Noda, Japan's finance minister, said he had been in contact with authorities overseas, and analysts expected Japan to be spared international criticism.
"We will take decisive steps if necessary, including intervention, while continuing to closely watch currency market moves from now on," he said.
However, a prominent US politician said that the decision was "deeply distubing".
Estimates varied on how much Japan had spent in its first intervention in the foreign-exchange market since 2003-2004, when it forked out 35 trillion yen ($409bn).
Traders cited market estimates that Wednesday's efforts amounted to around 1.5 trillion yen ($17.67bn).