(Bloomberg) -- The yen advanced to a six-month high versus the dollar as Japan’s decision to raise its bond-yield cap last month stoked bets the nation may tighten policy even more.

The currency appreciated as much as 0.8% to 129.79 per dollar, surpassing the level of 130.41 set in August, and reaching the strongest since June. Gains were exacerbated due to a lack of liquidity with Japanese financial markets shut for new-year holidays.

“The yen’s current level is significantly undervalued, even after the recent rally,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management in Geneva. “I would expect an end to negative rates by April. This further removes obstacles for the yen to strengthen more.”

The yen has now climbed more than 16% from a three-decade low of 151.95 per dollar set in October. The recovery has been driven by government intervention to support the currency, the outlook for slowing US interest-rate hikes, and speculation the BOJ is about to unwind its ultra-accommodative monetary policy, which will push up bond yields and lure funds to the nation’s assets.

The yen may appreciate to 120 per dollar as the BOJ backs away from its ultra-dovish settings, Eisuke Sakakibara, a former vice finance minster known as “Mr. Yen,” said in an interview last month. Generali Investments and Jupiter Investment Management Ltd. have also flagged 120 as the next potential target. 

The yen also rallied against its other Group-of-10 peers Tuesday. The currency appreciated 0.6% against both the Canadian dollar and Norwegian krone, and 0.4% versus the Australian dollar.

Read More: Investors Rush to Update Yen Playbook After BOJ’s Hawkish Shift

The yen’s current rally is a massive turnaround from September when hedge funds were rushing to go short due to the widening yield gap between the hawkish Federal Reserve and dovish BOJ. That divergence helped push the currency down by almost 25% by the time its reached last year’s low.

The BOJ meanwhile has been busy pushing back against bets it is about to end its super-accommodative settings. The central bank last week sought to defend its new 0.5% ceiling for the 10-year bond yield, increasing debt purchases for the month to a record 17 trillion yen ($131 billion), according to data compiled by Bloomberg.  

“The bigger question now is whether the BOJ will be happy with current developments or will they step in to weaken the yen again,” said Mingze Wu, a currency trader at StoneX Group in Singapore.

--With assistance from Matthew Burgess, Michael G. Wilson and Benjamin Purvis.

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