Gains in global stock markets saw investors cut holdings in the yen, which had risen on safe haven demand after Britain's vote to leave the European Union added to worries over global growth.
The safe-haven yen hit a more than two-week low against the dollar on Tuesday and fell 1 percent versus the euro, as a weekend election victory by Japan's ruling coalition fanned expectations of more stimulus and bolstered risk sentiment.
Gains in global stock markets saw investors cut holdings in the yen, which had risen on safe haven demand after Britain's vote to leave the European Union added to worries over global growth. But Tuesday's drop in the yen saw it erase gains made after the shock Brexit vote on June 23.
The dollar rose 0.8 percent to 103.64 yen, its strongest since June 24, when the British referendum result sent ripples across global markets. The euro also jumped 1 percent to 114.93 yen, its highest since June 24.
Japanese Prime Minister Shinzo Abe said on Monday that he will instruct Economy Minister Nobuteru Ishihara on Tuesday to start work on compiling a fiscal stimulus package, but did not indicate a size.
Ruling party sources had told Reuters before the election that the government was ready to spend more than 10 trillion yen. Another focus is whether the Bank of Japan will expand monetary stimulus at its policy meeting in late July.
Traders in London said former Federal Reserve chief Ben Bernanke's presence in Tokyo had also boosted expectations that the BOJ was preparing for more easing. The BOJ adopted negative rates earlier this year in addition to its asset buying programme, but is far from achieving its inflation target.
"The market is now priced for more than 10 trillion yen, but it will be more about the fiscal-monetary coordination that is driving markets," said Hans Redeker, head of currency strategy at Morgan Stanley.
"The previous Fed Chairman Bernanke, who initiated QE3, is visiting the BOJ, inflating markets with expectations that the BOJ is accompanying the fiscal stimulus with ultra-loose policies, taking Japan closer to what is widely known as providing helicopter money."
Traders said the yen's drop has been exacerbated by position squaring.
"In dollar/yen, there had been an excessive build up of yen-buying positions and such bets are getting squeezed," said Shinsuke Sato, head of FX trading group for Sumitomo Mitsui Banking Corporation.
He added the dollar could add to its gains if upcoming U.S. economic data and comments from Federal Reserve officials appear to favour a Fed rate rise in September, a view that has lately lost support.
With interior minister Theresa May set to become Britain's prime minister on Wednesday, ending weeks of political uncertainty, sterling rose 1.1 percent to $1.3145, pulling away from a 31-year low of $1.2798 struck last week. Investors nevertheless remain uncertain about May's approach to negotiating Britain's exit from the EU.