The news sent shockwaves through the markets as banks raced for cash, sending overnight rates soaring and prompting the European Central Bank to inject funds into the system to ease liquidity concerns. The Federal Reserve followed suit later in the session.
Equities tumbled, prompting investors to pare back carry trades in which low-yielding currencies such as the yen are sold to fund the purchase of riskier, higher-yielding currencies elsewhere.
The yen, which had weakened in the last two days as a semblance of stability returned to global equity markets, rose 1 per cent to Y118.40 against the dollar, 1.8 per cent to Y162.05 against the euro and 1.7 per cent to Y239.60 against the pound.
The higher-yielding Australian and New Zealand dollars were worst hit, tumbling 2.3 per cent to Y100.80 and 2.8 per cent to Y89.23 respectively.