The yen surged on Friday (Jan 13), adding to earlier gains on speculation the Bank of Japan (BOJ) will revise its ultra-loose monetary policy, while the US dollar edged up against most other major currencies, rising off of a seven-month low.

The yen was up 1.06 per cent against the greenback at 127.92 yen at 3 pm EST. The move added to a 2.4 per cent gain on Thursday after the Yomiuri newspaper said BOJ officials would review the side effects of the central bank’s yield curve control (YCC) policy at their meeting next week.

The BOJ is an outlier in clinging to stimulus, while most central banks globally are deep into rate-hiking campaigns. But signs of stickier inflation and a possible rise in Japan’s mostly stagnant wages have convinced some investors that YCC could be revised, or even abandoned, as early as next week, opening the door to a stronger yen.

“While a hike next week seems unlikely, it’s possible that the BOJ abandons YCC then in order to set up lift-off at the March or April meetings,” said Win Thin, head of global head of currency strategy at Brown Brothers Harriman. “This is the basic road map for tightening that’s been well-established by the US Federal Reserve.”

The yield on Japan’s benchmark 10-year government bonds breached the central bank’s new ceiling on Friday, adding to pressure for the yield control policy to be scrapped or revised.

The central bank said on Friday it would conduct additional outright bond purchases on Monday, ahead of its Jan 17-18 rate setting meeting.

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“Our estimated impact of further BOJ policy adjustment points to potential yen appreciation of up to 2.7 per cent, but we believe the risk is for a larger reaction – potentially double in size,” Barclays foreign exchange analysts said in a note to clients.

Elsewhere, better-than-expected economic data out of Germany and Britain suggested both countries could escape a recession – at least for now – but the news failed to provide a lasting boost to either the euro or sterling.

The euro was last down 0.2 per cent against the dollar at US$1.0828, easing off a fresh nine-month high earlier in the session. Sterling rose 0.12 per cent to US$1.22275.

The dollar index, which measures the greenback against a basket of currencies, including the euro and yen, edged up 0.02 per cent to 102.22.

The dollar index had hit it lowest level since Jun 6 earlier in the session, following data on Thursday that showed cooling US inflation, firming up expectations the Fed will slow the pace of its interest rate hikes.

The University of Michigan Surveys on Friday showed that US consumers believe price pressures would ease back to levels seen in the spring of 2021 over the next year. REUTERS