Japanese officials announced their "decisive action" to bolster the yen in a rare public comment. The dollar lost more than two yen after the Bank of Japan sold dollars to boost its currency. The dollar fell as low as 129.52, down from an earlier high of 133.64.
Japan's Finance Minister, Hikaru Matsunaga, said: "The recent depreciation of the yen raises serious concern in view of the need for avoiding the exacerbation of large external imbalances and cannot be justified given Japan's potential economic strength.
"Today we took decisive action in the exchange market following the announcement of policy measures designed to set the Japanese economy onto a firm recovery path."
Robert Rubin, the US Treasury Secretary, welcomed the moves and called on Japan to put in place a "strong programme" quickly.
"We share the concern expressed by the Japanese Prime Minister about recent weakness in the yen, and in that context we welcome the action undertaken by the Japanese authorities in the exchange market to support the value of the yen," he said.
The move came as the government finally came up with the long-awaited economic stimulation package worth some 10 trillion (pounds 45bn), aimed at fending off the prospect of the first recession in 23 years. The package includes tax cuts and massive public spending and is the biggest of its kind in the nation's history.
However, its introduction caused a serious loss of face for Prime Minister Ryutaro Hashimoto, who made fiscal conservatism the cornerstone of his economic policies and had denounced tax cutting as a way out of the economic downturn.
Moreover, the package means Japan will have to incur a deficit budget in excess of the amount permitted by a law introduced by Mr Hashimoto just five months ago. It will therefore have a rough passage in parliament, which on Wednesday demonstrated its dislike for high public spending by passing the final stage of this year's conservative budget.
Details of the package have yet to be unveiled but it includes income tax cuts of 4 trillion over two years, designed to boost domestic spending which is at its lowest level in three decades.
The package was bigger than expected but greeted with less than enthusiasm by the domestic and international investors who have been braying for tax cuts, rather than the more timid economic stimulation measures announced earlier. Share prices in Tokyo rose cautiously by just below 1 per cent.
On Wednesday the Paris-based Organisation for Economic Co-operation and Development (OECD) warned that Japan was facing a 0.3 per cent economic contraction, the first since 1973. Pressure for a relaxation of Mr Hashimoto's conservative fiscal policies has come from countries around the world who fear that Japan's economic downturn will drag down the rest of the global economy.