By Richard Hubbard
LONDON (Reuters) - The yen rose against the dollar and the euro on Wednesday as investors reconsidered a G7 statement on exchange rates aimed at soothing concerns of a currency war but instead provoked a fresh bout of volatility.
The G7 reaffirmed its commitment to market-determined exchange rates and said that fiscal and monetary policies must not be directed at devaluing currencies in its statement which was interpreted as condoning the recent weakness in the yen.
However, an official from the group later said Tuesday's statement was meant to signal concerns about excessive yen moves, prompting a vicious reversal in the currency.
"It appears there is a lack of consensus at the G7 level in tackling the unintended weakening of currencies, due to the adoption of expansionary domestic monetary policies," analysts at Barclays said in a note clients.
In early European trading the dollar and the euro had both fallen by 0.3 percent against the yen to 93.20 yen and 125.42 yen respectively.
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At the centre of the debate is Japan, where Prime Minister Shinzo Abe's government has made it clear that it will push for aggressive policies to beat deflation through drastic monetary expansion. Anticipation of a bolder Bank of Japan policy has sent the yen down nearly 20 percent against the dollar since November.
Dealers said the market was likely to trade cautiously ahead of the outcome of a Bank of Japan meeting ending on Thursday and before a meeting of the Group of 20 finance ministers and central bankers in Moscow on Friday and Saturday.
Markets are also awaiting the Bank of England's quarterly inflation report which should show whether there's any realistic chance of further asset purchases in coming months which would add to pressure on sterling.
The euro zone will publish industrial production data for December at 1000 GMT, seen as likely to confirm that output in final quarter was very weak.
The data comes out a day ahead of flash estimates of fourth quarter GDP for the whole euro area which is forecast to show growth contracted by around 0.4 percent in the final three months of the year - the steepest quarter-on-quarter decline since the first quarter of 2009.
Ahead of the data Europe's share markets were little changed with the FTSE Eurofirst 300 index of top companies opening flat but near the top of a six-day trading range, with the focus on corporate earnings reports.
London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were between 0.1 percent higher and 0.2 percent down.
Debt markets were also little changed as investors await the results of an auction of long-term Italian debt which is seen as a test of demand before elections later this month.
Italian debt has been under pressure in recent weeks as a comeback in the opinion polls by former Prime Minister Silvio Berlusconi's party has raised the prospect of a fragmented parliament that could hamper the next government's reform efforts.
Germany also plans to sell 5 billion euros of two-year bonds.
(Editing by Anna Willard)