After a closely watched meeting, the Bank of Japan said it would allow "greater flexibility" in government bond markets, having allowed them to move in a tight band in a process known as yields curve control.
But on Friday it said that while it would maintain that range, its upper and lower limits would be used as references, rather than being rigid.
The move means rates in Japan would be allowed to rise more than previously. The yen swung after the announcement, weakening to as much as 141.32 per dollar and strengthening to 138.07.
The currency has been hammered for more than a year as the BoJ refused to shift from its loose policy, even as central banks around the world pushed up interest rates to fight surging inflation.
However, with prices picking up at home and the yen struggling, pressure has been growing on the bank to change tack.
The Nikkei 225 index sank more than two percent on the prospect of higher borrowing costs before paring the losses by the close.
"The BoJ's decision to tweak their yield curve control was broadly in line with what the market had anticipated, but probably not as hawkish as previously feared," said Khoon Goh, of Australia and New Zealand Banking Group.
"Market reaction has been very choppy as it is not a straightforward decision to digest."
Traders had been on edge ahead of the announcement due to fears that tighter monetary policy would see Japanese investors -- the biggest foreign owners of US Treasuries with vast holdings of other global assets -- move their cash back home owing to better returns.
"It's worth noting that Japanese investors have already sold a significant amount of foreign fixed income and have cash in dollars and foreign currencies that are waiting to be invested," said Stephen Innes, of SPI Asset Management.
"This means that Japanese investors are currently underweight in Japanese government bonds and yen. As a result, there is a high possibility of a significant flow of funds being repatriated back into yen and invested in fixed income," he added.
A decision late last year by the BoJ to widen the band within which it allows bonds to move sent shudders through markets and sent the yen soaring.
World markets have enjoyed a broadly positive week on hopes the Federal Reserve and other central banks were at or close to the end of more than a year of monetary tightening as inflation comes down.
The Fed said Wednesday that future rate decisions would be determined by data, which was welcomed by investors who saw recent indicators -- pointing to an easing of price pressure and softening of the labour market -- as giving it room to hold off more increases.
And on Thursday, European Central Bank boss Christine Lagarde left open the possibility of a pause.
However, news that US growth beat expectations in the second quarter as jobless claims slipped revived the possibility that there was still more work to do.
After a negative day on Wall Street, Asian equities were mixed.
Hong Kong and Shanghai were boosted by hopes for further measures by Beijing to boost the struggling Chinese economy, and Singapore, Seoul and Taipei were also up.
Sydney, Wellington, Manila, Mumbai and Jakarta fell.
Paris dipped in the morning even as data showed the French economy grew a forecast-busting 0.5 percent in the second quarter, while inflation eased in July.
London rose but Frankfurt dropped following tepid German gross domestic product figures.
- Key figures around 0810 GMT -
Tokyo - Nikkei 225: DOWN 0.4 percent at 32,759.23 (close)
Hong Kong - Hang Seng Index: UP 1.4 percent at 19,916.56 (close)
Shanghai - Composite: UP 1.8 percent at 3,275.93 (close)
London - FTSE 100: UP 0.1 percent at 7,702.18
Dollar/yen: UP at 139.55 yen from 139.44 yen on Thursday
Euro/dollar: DOWN at $1.0956 from $1.0978
Pound/dollar: DOWN at $1.2781 from $1.2794
Euro/pound: DOWN at 85.73 from 85.78 pence
West Texas Intermediate: UP 0.1 percent at $80.15 per barrel
Brent North Sea crude: UP 0.1 percent at $84.31 per barrel
New York - Dow: DOWN 0.7 percent at 35,282.72 (close)
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