TOKYO, Dec 20 Reuters The yen surged to a fourmonth peak against the dollar on Tuesday after the Bank of Japan stunned markets by deciding to review its yield curve control policy and widen the trading band for the 10year government bond yield.

While it kept broad policy settings unchanged pinning shortterm JGB yields at 0.1 and the 10year yield around zero the BOJ decided to let longterm yields to move 50 basis points either side of its 0 target, wider than the 25 basis point band previously.

At the postannouncement media briefing, BOJ Governor Haruhiko Kuroda sought to emphasize that the change was not an interest rate hike, but to improve bond market function. He reiterated that it39;s too early to discuss an exit from stimulus.

The dollar last traded 2.93 weaker at 132.91, after earlier tumbling as much as 3.1 to 132.68 yen , a level last seen in midAugust.

Most BOJ watchers had expected no changes until Kuroda39;s 10year term finishes at the end of March.

This was really out of the box, said Bart Wakabayashi, branch manager at State Street in Tokyo.

We39;re seeing them start to test the market about the exit strategy, he added. For dollaryen, we could see a break below 130. It39;s very much within reach this year.

The 10year JGB yield jumped to 0.46 from the previous cap at 0.25. It pulled equivalent U.S. Treasury yields higher as well, with the 10year soaring to the highest this month at 3.711.

The U.S. dollar index sank, dropping 0.35 to 104.25 and…