The strengthening yen could see Japan's central bank eke out more stimulus as early as next month, confounding expectations for policy inaction following January's surprise move to negative interest rates.
The yen rallied to 110 against the greenback during Thursday's U.S. session, its strongest level since October 2014, amid relentless dollar selling after the Federal Reserve played down prospects for tighter monetary policy on Wednesday.
"At these [yen] levels, it is hard to see the Bank of Japan not extending their stimulus program in some form at their April 28 meeting," IG market strategist Angus Nicholson said on Friday.
A stronger yen hurts Japan's economy and is especially detrimental to the export sector because it makes local goods more expensive for overseas buyers, providing a fillip to rival Asian manufacturers with weaker currencies, such as South Korea.
The central bank held fire at Monday's monetary policy review, as anticipated, and economists believed it would continue to take a wait-and-see approach to assess the impact of January's negative interest rates decision. But that may no longer be the case.
"If USD/JPY drifts lower again, we expect more aggressive action from the Bank of Japan," Kathy Lien, managing director of FX strategy at BK Asset Management, said on Friday.