FOREX-Yen slammed to near seven-year low vs dollar on BoJ easing

(Updates with New York open, comment; dateline previously LONDON)

* BoJ's surprise could put pressure on ECB to ease

* Euro struggles vs dollar, euro zone inflation in-line

* Dollar index extends reaches fresh four-year highs

By Daniel Bases

NEW YORK, Oct 31 (Reuters) - The yen plunged to a near seven-year low against the U.S. dollar on Friday, putting it on track for its worst day in 18 months, after the Bank of Japan shocked financial markets with an aggressive easing of its monetary policy.

In addition to the BoJ's decision on Friday to expand its purchases of Japanese government bonds, an announcement by the country's government pension fund that it would increase its holdings of foreign and domestic shares further eroded the yen's position.

Ahead of Friday's developments, BoJ already had a massive monetary stimulus plan in place designed to address decades of deflationary pressures and low economic growth.

While some investors had expected some easing, most had thought any additional action was months away as Governor Haruhiko Kuroda had voiced optimism over the Japanese economic outlook even after soft economic data.

Japan's monetary policies are moving in the opposite direction of the hawkish policy tone adopted earlier this week by the U.S. Federal Reserve, which drove market expectations that the Fed will increase U.S. interest rates sooner than previously forecast.

In New York trade, the dollar surged 3 percent to 112.47 yen , its highest level since Dec. 31, 2007. The dollar is on track for its biggest one-day move against the yen since April 2013.

There are two elements working in favor of a stronger dollar, says Win Thin, currency strategist at Brown Brothers Harriman in New York. "On one side you have firm U.S. data and the Fed on track to hike next year. On the other side you have the BoJ's aggressive dovish move and the expectations that the ECB is going to have to do more in light of the weak data. That's driving euro/dollar down."

The European Central Bank had remained more hesitant in the face of deteriorating economic data in the euro zone. And the 0.4 percent rise in consumer prices in October announced on Friday lowered expectations the ECB will ease policy at its meeting next week.

The euro fell to a 26-month low of $1.2484 before paring losses to trade just above the $1.25 level, down 0.83 percent on the day. Against the yen, the euro traded up 2 percent, to 140.46 yen, having earlier reached a six-week high of 140.70 yen.

The dollar index, which measures the greenback against six major currencies, reached a four-year high of 87.133.

Gareth Berry, a currency analyst with UBS (NYSEArca: FBGX - news) , said both the BoJ's monetary easing and the announcement by the Government Pension Investment Fund are likely to propel dollar/yen higher, taking the pair closer to their three-month forecast of 115 yen.

"We doubt it would escape investor attention that, with the BoJ buying at a faster pace with near-immediate effect, an early start to GPIF diversification could be more likely," he wrote. (Additional reporting by Anirban Nag in London, and Shinichi Saoshiro and Hideyuki Sano in Tokyo; Editing by Catherine Evans and Leslie Adler)