Yen hits record-high against US dollar as Nikkei falls
The Japanese yen has hit its strongest level against the US dollar since the end of World War II.
The exchange rate reached 76.25 yen to the dollar during US trading hours, though by Thursday afternoon in Asia it was back at 79.14 yen.
Meanwhile, the Nikkei 225 index shed another 1.4%, on concerns about the impact of a strong yen on exporters.
G7 finance ministers are to hold a conference call to discuss how to deal with global market volatility.
The call is expected to take place on Friday morning, Japan time.
The G7 is a group of the world's seven richest nations, including the US, Japan and the UK.
The latest market jitters come as the US expressed increasing alarm at Japan's ability to contain a possible nuclear disaster at the Fukushima Daiichi reactors, and ordered its citizens to evacuate from Tokyo.
Japan's currency has been strengthening steeply since Japan was devastated by a magnitude 9 earthquake on Friday.
A rise in the yen is seen as undesirable as it undermines the competitiveness of Japanese exporters.
Analysts have been blaming the strengthening of the yen on the repatriation of assets and foreign currency by Japanese insurance firms.
Other Japanese investors also own large holdings of foreign currency assets.
During periods of volatility - such as the 2008 financial crisis - investors responded by repatriating these assets, pushing up the yen's value, and thereby cementing its status as a haven currency.
There may also be another reason behind the strengthening yen, according to currency strategist Sean Callow at Westpac Bank.
Japan typically runs a large current account surplus, thanks to the success of its exporters, who earn foreign currency that they then repatriate.
This inflow of money by exporters is normally balanced by an equal net outflow of Japanese investments into the rest of the world.
But following the earthquake, Mr Callow thinks Japanese investment flows have been temporarily disrupted, causing the yen to appreciate.
The extraordinary volatility on Thursday left currency market participants perplexed.
"It's mayhem out there," said one trader based in Australia. "The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in."
Analysts expect the G7 ministers to give Japan the go-ahead to intervene in currency markets to stabilise the yen.
"It seems inevitable that the yen will be part of a broader discussion on stabilising global markets," said Alan Ruskin of Deutsche Bank.
"It would be nothing short of amazing if they fail to at least make some veiled threat of intervention," he added.
Japan's Finance Minister Yoshihiko Noda declined to comment on whether or not Japan would step into the market but said he would keep an eye on developments.
"I will be closely watching market moves today," he said.
The minister has blamed speculation for the yen's surge.
"Market moves have been nervous amid speculation, while trade has been thin," Mr Noda said.
However, economy minister Kaoru Yosano commented on Thursday that financial markets had not yet been destabilised enough to warrant a currency intervention by the G7 to weaken the yen.
"We would like to get psychological support from the G7," he said.
The economy minister also said the Japanese government did not yet intend to buy shares in order to stop the stock market sell-off.
The Nikkei has fallen 14% since the earthquake struck.
In an effort to ease market concerns and provide emergency liquidity, Japan's central bank pumped a further 6 trillion yen ($63bn; £39bn) - equivalent to 1.5% of the country's annual economic output - of same-day loans into the banking system.
This is the fourth such injection of funds by the Bank of Japan, taking its total support over recent days to 55.6tn yen.
The central bank also doubled the size of its asset-purchasing programme - its main tool for supporting the broader economy.
Nonetheless, the Bank of Japan faces a policy conundrum.
With Japanese rates already at almost zero, the central bank cannot cut interest rates in order to weaken the yen against other major currencies, such as the dollar or euro where interest rates are also close to zero.
Analysts think the central bank may now go a step further and intervene directly in markets to stem the currency's rise by selling yen and buying dollars and other foreign currencies.
"Apart from intervention, there isn't much to stop this slide and the dollar doesn't look like it's coming back soon," said Brian Dolan, chief strategist at Forex.com.