The Japanese yen rose to a seven-month high against the United States dollar on Tuesday (Jan 3), breaking the 130 mark and building on a rally sparked by the Bank of Japan’s (BOJ) decision to move away from its long-standing ultra-loose monetary policy.

The unit strengthened to 129.52 per US dollar at one point before easing slightly, and analysts tipped it to continue advancing as the BOJ changes tack with a shift out of negative interest rates tipped to be in the pipeline.

This comes as the US Federal Reserve and other central banks look to slow down the pace of interest rate hikes implemented over the past year to fight decades-high inflation.

The BOJ said last month it would loosen its grip on yields and allow those on certain government bonds to move in a wider band.

The announcement saw the yen surge by the most in three decades. It is now at its strongest level since June, having hit a 32-year low close to 152 per dollar as recently as October.

Now, it is seen pushing even higher.

“The yen’s current level is significantly undervalued, even after the recent rally,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management.

“I would expect an end to (the BOJ’s) negative rates by April. This further removes obstacles for the yen to strengthen more.”

The yen’s sharp rise was also spurred by fewer participants in the market at the beginning of the new year, brokers said.

SPI Asset Management’s Stephen Innes told AFP: “Into the holiday, forex traders bought yen as a hedge in case there were some hints of BOJ policy announcement. This has picked up steam.”

“The latest move is getting generated because the market is raising the odds of a material shift in BOJ policy.”