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Dollar/yen hits 156.8

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Bank of Japan leaves short-term rates near zero

(Updates prices and headline at 0830 GMT)

By Tom Westbrook and Joice Alves

SINGAPORE/LONDON, April 26 (Reuters) - The yen rose

sharply after hitting its weakest level in three decades against

the U.S. dollar with markets on edge about possible intervention

after the Bank of Japan kept interest rates on hold on Friday.

In a volatile trading day, the yen rose suddenly

to 154.97, after hitting minutes earlier its lowest level of

156.82 per dollar since 1990.

The sudden jump left traders on high alert for signs of

intervention.

After a two-day meeting, the Bank of Japan left its

short-term interest rate target at 0-0.1% on Friday and made

small upward adjustments in its inflation forecast. Investors

had not expected a policy shift but took the decision as

confirmation that only small moves lie ahead.

BOJ Governor Kazuo Ueda said the weak yen so far has not had

a big impact on the inflation trend.

The yen also slid to its weakest level in almost 16

years against the euro, at 168.23, and its softest in

nearly a decade versus the Australian dollar.

"There is little indication the BOJ is considering raising

rates in the near term," said Prashant Newnaha, senior

Asia-Pacific rates strategist at TD Securities in Singapore.

"Today's ... meeting greenlights the yen carry trade and

could see USD/JPY accelerate towards 160-161 over coming weeks."

INTERVENTION WATCH

The yen's 11% drop against the dollar this year is the

largest fall of any G10 currency, driven mostly by the wide gap

between U.S. and Japanese government bond yields, which is more

than 375 basis points for the 10-year tenor.

That encourages borrowing and short-selling yen in order to

earn better interest, or carry, in dollars and other currencies.

The gap could widen even further, and exacerbate pressure on

the yen, if the Federal Reserve's preferred inflation measure -

the U.S. core PCE price index - rises in data due at 1230 GMT.

"If dollar/yen keeps going up, (intervention) wouldn't

surprise ... given you've had a lot of yen weakness and a lot of

very public pushback from Japanese officials," said Joe Capurso,

a strategist at the Commonwealth Bank of Australia.

"The market's not really taken it seriously, so at some

point they'll draw a line in the sand and say enough is enough."

The yen has slipped past levels at 152 and 155 to the dollar

where traders had been wary of intervention. Japanese Finance

Minister Shunichi Suzuki said on Friday he was closely watching

currency moves and was prepared to take full steps in response.

Still, traders figure there is not much Tokyo can do to

reverse the currency's slide while interest rates and momentum

are heavily skewed against it.

Elsewhere, yen selling lifted the Australian and New Zealand

dollars, and the Aussie is set for its largest weekly

gain in five months after a surprisingly hot inflation print.

For the week it has gained 2% and it rose to a two-week high

on Friday, last up 0.5% to 0.6552. The New Zealand dollar

is up 1.3% this week to $0.5966, its biggest weekly

gain in almost two months.

Sterling and the euro were steady,

holding gains made on Thursday when data showed the U.S. had

grown at its slowest pace in nearly two years.