Yen rallies as Japan Q3 growth beats forecasts

TOKYO, Nov 14 (Reuters) The yen surged against major currencies on Tuesday after data showed Japan's economy grew more rapidly than expected in the third quarter, keeping the Bank of Japan on track to raise interest rates in the next few months.

Japan's gross domestic product grew at a 2 percent annual rate in the July-to-September quarter, double forecasts, while growth for the previous quarter was revised up to a 1.5 percent annualised pace from 1.0 percent previously.

Analysts said the surprisingly strong data kept alive the possibility of the BOJ lifting rates to 0.5 percent by the end of the year, even as most market players see the central bank waiting until January or February for a move.

''The chance of a rate increase by the BOJ in January of February is large unless we get surprising poor data on production,'' said Yasuhiro Onakado, chief economist at Daiwa SB Investments.

The yen has been dogged by Japan's ultra-low interest rates as other major central banks have steadily ratcheted rates higher, driving Japanese investors to higher yielding assets abroad.

Many investors have also borrowed in yen and sold the currency to buy higher yielding assets in the carry trade, one factor behind the yen's slide to all-time lows against the euro and an eight-year trough versus the pound.

The dollar tumbled about half a percent to a low of 117.54 yen before clawing back to 117.80 yen.

The euro slid to 150.75 yen before recovering to 150.95 yen, still not far from the all-time high of 151.48 yen struck last week.

The single currency was little changed at $1.2810.

The GDP data caught market players off guard after a run of weak Japanese economic figures had prompted many to think the data could show a contraction on the quarter.

''The market was waiting for a weak one,'' said a trader at a European securities house.

Before the data, the dollar had clawed back from 2-1/2-month lows against the euro and an 18-month trough against sterling as investors came around to believe that central banks were unlikely to shift foreign reserves en masse out of the dollar.

China's central bank chief caused a stir late last week by saying that the country had a clear plan to diversify its reserves, the world's largest at more than $1 trillion.

China and other central banks have indicated in the past a desire to shift some of their dollar holdings into other major currencies.

Market players are now awaiting a slew of economic data later in the session that could give currencies near-term direction, including Germany's ZEW survey of consumer sentiment and U.S. figures on retail sales and wholesale prices.

The retail sales report will be closely scrutinised as investors look for clues on how the U.S. consumer is holding up in the face of a sharp housing market shake-out.

The median forecast in a Reuters poll was for sales to fall 0.4 percent in October, the same as the previous month.

Excluding autos, sales are seen dipping 0.2 percent.

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