The currency climbed 3 per cent to hit 107.6, its strongest level since August 1996, prompting fresh, but vague warnings that the government might intervene to restrain the rise.
However, the bright picture in Japan contrasted sharply with gloom in Asia where the violence in East Timor continued to depress the markets.
Japan's GDP rose 0.2 per cent in the three months to June, exceeding expectations of a 0.3 per cent contraction. The rise was driven by a 0.8 per cent increase in consumer spending, supported by a record 16.1 per cent leap in spending on housing.
Shares also responded positively, with the Nikkei gaining 0.2 per cent. The news was welcomed by Japan's leading industrial figures with Kakutaro Kitashiro, president of IBM in Japan, saying: "The recovery is becoming real."
But analysts cast doubt on the strength of the rebound, saying it came against a background of record high unemployment. "Given that unemployment and wages continue to head downward, I am not convinced this is the start of a sustained domestic-driven recovery," said one.
The yen, up 13 per cent since July, threatens to stifle recovery among exporting manufacturers. Yesterday Nobuaki Usui, the vice-finance minister, said the appreciation was "not favourable" to the economy, adding: "We will monitor movements in foreign exchange markets and take appropriate action if needed."
Meanwhile, the Indonesian rupiah plunged 4.3 per cent to 8,980 to the dollar, its lowest level in five months. Fears that the violence in East Timor could lead to its aid package being frozen grew after Hubert Neiss, IMF Asia Pacific director, said this month's mission, on which the latest $450m tranche depends, was "on hold".Reuse content