SINGAPORE/SYDNEY: The yen hit a 2-1/2 year low against the dollar on Friday as markets positioned for the Bank of Japan to take bold action to tackle deflation at a policy-setting meeting early next week.
Sources familiar with the BOJ's thinking told Reuters the central bank, under relentless pressure from Prime Minister Shinzo Abe, will consider making an open-ended commitment to buy assets until 2 percent inflation is foreseen.
Such an open-ended asset buying scheme would exceed market expectations, which have been centred around the BOJ setting a 2 percent inflation target and possibly increasing its asset-buying programme at its Jan. 21-22 meeting.
While the dollar may run into some profit-taking against the yen after the BOJ's policy decision on Tuesday, it is ultimately likely to head higher, said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.
"There might be a dip after the BOJ, but the drop could turn out to be surprisingly shallow, and I think from there the direction will be a rise towards 93 yen to 95 yen," he said.
The dollar rose as high as 90.21 yen on trading platform EBS, the greenback's strongest level since June 2010. That marked a gain of some 14 percent compared to a trough hit in early November.
The dollar last changed hands at 90.11 yen, up 0.3 percent from late US trade on Thursday.
Adding to the pressure against the yen were comments by Koichi Hamada, Abe's special economic adviser, saying a weakening of the yen to 95 or 100 to the dollar would be nothing to worry about.
On technical charts, initial resistance for dollar/yen is seen around 90.34, the 76.4 percent retracement of its May 2010-October 2011 fall. A break there brings the 2010 high of 94.99 into focus.
Maeba at UBS said one possible short-term target for the dollar was 90.75 yen. Dollar-selling from options players might emerge near that level, where there is an option barrier, he said.
If the BOJ were to shift to an open-ended asset buying scheme, an additional focal point would be the pace of asset purchases, said Rob Ryan, strategist for RBS in Singapore.
"What will be important is an open-ended commitment ... plus an increase in the rate of purchases," Ryan said.
"Open-ended purchases at a pace dictated by the BOJ with no commitment on that pace and no commitment by when they will reach two percent inflation is much less powerful as a signal," he said.
Traders said the risk now, of course, is if the BOJ undershoots expectations.
"We think there is some risk of disappointment at the BOJ meeting and scope for a yen rally. It is now consensus that the BOJ will move to a two percent inflation target. However, more aggressive measures may not come until closer to the nomination of the new governor/deputy governors in Q2," said Kiran Kowshik, strategist at BNP Paribas.
Underscoring the yen's weakness, the Australian dollar scaled a high around 95.00 yen on Friday, its highest level since August 2008.
Earlier, the Australian dollar got a brief lift against the greenback after data showed that China's economy grew 7.9 percent in the fourth quarter from a year earlier, snapping seven straight quarters of slowing expansion.
The Aussie dollar later sagged back, however, and last fetched $1.0523, down 0.2 percent on the day.
The euro edged up 0.1 percent to $1.3385, hovering near an 11-month high of $1.3404 set on Monday.
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