On the heels of a Friday intervention in which the BOJ unexpectedly bought euro for yen through the European Central Bank, the BOJ started the week by aggressively buying dollars and, in late afternoon, euros, bankers said. The moves follow two other recent dollar-buying interventions.

"I have three things to tell you: One, we do not want a premature strengthening of the yen," top financial diplomat Eisuke Sakakibara told reporters as he arrived at the Ministry of Finance on Monday, just as the BOJ was said to be intervening.

"Two, we do not intend to contain foreign exchange rates within a narrow range. Three, we do not plan any target zones," said Sakakibara, the vice finance minister for international affairs.

The BOJ was spotted in the market early in the morning around 120.70 yen and spentan estimated $5 billion in aggressive yen-selling bursts to drive the dollar as high as 122.55 yen. It was around 122.15 yen in late afternoon trade.

Tokyo shares rallied strongly as exporter stocks surged, with the benchmark Nikkei stock index climbing 307.59 points or almost 1.8 per cent to 17,738.85, its highest close since October 1997.

The intervention came as the government reported Japan's exports dropped 11.8 per cent in May from a year earlier, outpacing a 3.3 per cent import decline to narrow the nation's trade surplus for the second consecutive month.

The customs-cleared surplus shrank 31.5 per cent to 834.3 billion yen, well below the average 969 billion yen forecast of economists surveyed by Reuters. The 13 forecasts had ranged from 838 billion yen to 1.14 trillion yen.

Exports to the United States, the rest of Asia and the European Union all fell.

Chief economist Chris Calderwood at Jardine Fleming Securities (Asia) in Tokyo said exports sank on a delayed reaction to the yen's risefrom last October and because Japan's export markets are not as robust as many had thought.

A strong yen hurts the Japanese economy by making its exports more expensive in other currencies and by shrinking the yen value of Japanese companies' overseas earnings.

Although many in the market questioned the staying power of the BOJ's intervention, the aggressive yen-selling challenged the market view that the authorities simply wanted to defend the dollar at 120 yen.

Some also thought the Japanese authorities had abandoned a presumed stance of trying to keep the dollar below 125 yen.

Sakakibara's comments represent a "major sea-change in policy" toward a weaker yen, said economist Andrew Shipley at Schroder Securities Japan.

"We're now beginning to see a recognition that the currency has to be used to support economic growth," Shipley told Reuters Television.

"This shift in policy is significant -- it could point to substantial yen weakness in the days ahead as the government finally resorts to usinga weaker currency to prop up a continued fragile economic recovery."

A weaker yen also helps fend off deflation, which remains a threat despite half a year of fiscal and monetary stimulus and huge cash infusions into the banking sector, Shipley said.

One of Sakakibara's predecessors at the Finance Ministry, Kosuke Nakahira, said the authorities were sending a clear signal that the market's bullishness on the yen was an overreaction to the unexpectedly strong 1.9 percent rise in economic growth in the January-March period from the previous quarter.

"I think (the BOJ and the Finance Ministry) are very much afraid the market's overreaction to this could nip the recovery in the bud," Nakahira said.

Underscoring the economy's weakness, an industry association reported on Monday that orders received by Japanese machine tool makers dropped 34 percent in May from a year earlier, the 15th decline in a row.

Overnight in Cologne, Germany, Prime Minister Keizo Obuchi reiterated to his Group of Eight partnershis pledge to break Japan's unprecedented two-year economic slide and eke out growth of 0.5 percent in the fiscal year to next March.