The yen surged to one-month highs against the dollar and the euro on Friday, extending a rally after Bank of Japan Governor Toshihiko Fukui gave his strongest signal yet the central bank will eventually raise interest rates.
Adding fuel to the yen's gains was a report in Japan's Yomiuri newspaper on Friday that the BOJ was considering the possibility of dismantling its policy of flooding the money market with excess funds as early as its March 8-9 meeting, traders said.
The yen had jumped more than 1 percent against the dollar on Thursday after Fukui said the BOJ's super easy policy was coming to an end and that rates would rise to a "neutral" level step by step. With an end to five years of quantitative easing all-but assured in the next two months, investors are waking up to the possibility that Japan's solid recovery from deflation means overnight rates will finally rise from virtually zero.
That drove two-year and five-year Japanese government bond yields to new five-year peaks on Friday, though they remain well below comparable yields in the euro zone and United States.
"This isn't the first time we've heard about the possibility of an end to the policy in March ... but the risks of that happening have increased a bit," said Fumihiko Kawano, forex manager at Nomura Securities. Traders said that an unwinding of carry trades -- in which investors borrow in a low-yielding currency like the yen to buy higher-yielding currencies -- had also helped to give the yen a lift.
The dollar tumbled to 116.42 yen on electronic trading platform EBS, its weakest since Jan. 27, before recovering to around 116.65 yen by 0610 GMT.
The euro spiked down to 138.84 yen before clawing back to 139.10 yen . But the single currency was little changed at $1.1920.
Some traders said the U.S. currency would find support around 116 yen, where Japanese importers were seen lined up to buy the dollar. Fukui repeated before a parliamentary committee on Friday that the conditions were falling into place for an end to quantitative easing. "The sell-off triggered by Fukui's comments yesterday is continuing," said Kaoru Kondo, chief analyst at Fisco.
The yen's big gains were enough to prompt Japanese Finance Minister Sadakazu Tanigaki to say that currencies were showing "some rough moves" and needed to be watched.