The yen gathered strength once more yesterday after the prospect of a permanent income tax cut resurfaced when Japanese Prime Minister Ryutaro Hashimoto promised to aim for reform of the country's tax system.
The beleaguered currency - which has experienced more than two weeks of intense volatility after the United States led a round of joint intervention to defend it - yesterday soared against the US dollar to 138.20 yen, sharply up from its New York close on Thursday of 141.22 yen.
Analysts said that Mr Hashimoto's comment was enough to send investors out of yen short positions - which they use to put downward pressure on the currency.
The lack of New York trading, due to the Independence Day holiday, also meant traders were reluctant to strike fresh positions ahead of the weekend.
Yesterday Mr Hashimoto raised the possibility of tax cuts in a campaign speech for Upper House parliamentary elections on July 12.
'I hope to have permanent tax reform and that is the direction I think it will go,' Mr Hashimoto said.
Analysts said a further boost to the yen came from fears that the Bank of Japan might attempt its third round of intervention since April because reduced market liquidity due to the US holiday meant it could generate sharp price movements.
Analysts warned that any effect from intervention, or Mr Hashimoto's comments, was likely to be short-term, and said there was little prospect of the yen retaining its strength without fundamental improvement in the economy.
In late trade yesterday, the yen weakened slightly to 139.11 yen.
Barclays Capital chief economist Brian Martin said even if a tax cut was introduced it would most likely only come into effect in April.
He said there was still considerable opposition to tax cuts from ruling Liberal Democratic Party members opposed to a worsening budget deficit.
'This will constrain the size of any tax cuts, which we reckon would have to be 15 trillion yen or more to have any impact,' he said.
Analysts are also still digesting the bridge-bank proposals unveiled on Thursday, which many believe will have no impact for at least two years and are insufficiently funded by the government.
Standard Chartered chief treasury economist Tim Fox said the focus would now shift to whether or not a more pro-reformist cabinet could be elected on July 12.
'Such a scenario could stabilise the yen,' he said.