Yen creeps higher on BOJ rate caution

TOKYO, Dec 28 (Reuters) The yen crept higher on Thursday, moving away from a two-month low against the dollar and an all-time low versus the euro on caution that the Bank of Japan might raise interest rates in January.

Industrial output in Japan rose 0.7 percent in November from a month earlier, government data showed. That fell short of expectations but indicated the economy continued to garner support from strength in the corporate sector.

''The data confirmed Japan's production remains solid,'' said Masaki Fukui, senior market economist at Mizuho Corporate Bank.

''But it did not give any positive surprise and was not something that can influence the rate outlook.'' The market expects the BOJ to boost the overnight call rate to 0.5 percent from the current 0.25 percent before the end of March, and many players say the chances of a January hike cannot be ruled out.

A media report that the central bank will probably discuss bumping up rates at next month's policy meeting lifted yields of Japanese government bonds the previous day, prompting investors to buy the yen.

In early Asian trade, the dollar dipped to 118.75 yen from around 118.85 yen in late U.S. trading. It rose to a two-month peak of 119.23 yen on Tuesday.

The euro barely budged at $1.3115. But it edged down to 155.75 yen off a record peak of 156.42 yen hit last week.

The dollar was underpinned after a surprisingly robust housing report on Wednesday suggested the U.S. housing market was stabilising, trimming expectations for interest rate cuts by the Federal Reserve next year.

As home prices slid this year, their value as collateral has also fallen, hurting consumers' creditworthiness. That has caused concern that the cooling housing market will force consumers to spend less, weighing on the U.S. economy.

Reuters SBA VP0652