Yen surges after surprise BOJ policy tweak

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By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The yen jumped to a four-month high against the U.S. dollar, on pace for its biggest one-day rise in 24 years, on Tuesday after the Bank of Japan stunned markets with a surprise tweak to its bond yield control program.

While it kept broad policy settings unchanged - pinning short-term JGB yields at -0.1% and the 10-year yield around zero - the BOJ decided to let long-term yields move 50 basis points either side of its 0% target, wider than the 25 basis point band previously.

The move rattled investors already worried about the economic fallout of rising interest rates and untameable inflation around the globe.

The dollar was down 3.9% against the Japanese currency at 131.655 yen. It hit a low of 130.58 yen, a level last seen in early August.

The timing of the move surprised since most BOJ watchers had expected no changes until the current governor Haruhiko Kuroda's 10-year term ends at the end of March.

"We would have expected this to be a more of an early 2023 story as opposed to now," said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

"The BOJ amending its yield curve control policy has been a significant mover for FX market overnight," Rai said.

The 10-year JGB yield jumped to 0.46% from the previous cap at 0.25%. It pulled equivalent U.S. Treasury yields higher as well, with the 10-year soaring to the highest this month at 3.711%.

The hit to the dollar comes at a time when the currency has been in retreat after big gains for the year as investors grow increasingly convinced that the U.S. Federal Reserve is close to being done with its dollar-boosting jumbo interest rate hikes.

"The risks over the medium term are tilted towards downside in dollar-yen... given the sheer size of the dollar-yen market, that should migrate to other currencies as well," CIBC's Rai said.

The U.S. dollar Index, which through late September had gained nearly 19% for the year, has given up a lot of those advances to trade up about 9% for the year.

On Tuesday, the yen's gains were broad, with the euro tumbling as much as 3.5% to the lowest since late September at 140.17 yen and sterling also sliding as much as 3.7% to the lowest since Oct. 12 at 160.34 yen.

The euro rose 0.12% against the dollar to $1.0621. With investors taking a dim view of riskier assets, the Australian dollar, seen as a liquid proxy for risk appetite, fell 0.38% to a new 1-month low.

At the post-announcement media briefing, BOJ governor Kuroda sought to emphasize that the change was "not an interest rate hike," but to improve bond market function. He reiterated it was too early to discuss an exit from stimulus.

"It's telling that the yen has maintained its strength after the announcement, suggesting the market doesn't believe Kuroda," said Jane Foley, head of FX Strategy at Rabobank.

"All the market sees here is that the Bank of Japan have opened the door a crack towards further policy tightening and the market seems fairly certain that could come in the spring," Foley added, saying that dollar-yen could fall as low as 125.

Meanwhile, bitcoin was 2.9% higher at $16,922 as cryptocurrencies continued to struggle to convincingly recover from the sharp losses dealt by the high-profile collapse of crypto exchange FTX.

(Reporting Saqib Iqbal Ahmed; Additional reporting by Kevin Buckland and Samuel Indyk in London; Editing by Chizu Nomiyama and Andrea Ricci)