* Bank of Japan refrains from easing policy further
* Euro-zone worries, softer U.S. data may boost yen demand
* Spanish, Italian yield spreads widen
By Luciana Lopez
NEW YORK, April 10 The yen surged to multi-week highs against the dollar and the euro on Tuesday after the Bank of Japan held policy steady, boosting the yen's appeal as rising Spanish and Italian bond yields underscored worries about the global economy.
But while the Bank of Japan chose not to loosen monetary policy further, markets are already factoring in easing at the next rate review on April 27, when revised long-term forecasts should show that a sustained end to deflation is a long way off.
Further increasing the appeal of safe havens such as the yen and U.S. Treasuries, Spanish bond yields rose to within a whisker of 6 percent and German Bund yields equaled their lowest-ever levels on Tuesday, reflecting worries about the euro zone's sovereign debt crisis.
"The yen has been getting a little bit of juice as a safe haven, with European equities getting crushed overnight," said John Doyle, currency strategist at Tempus Consulting in Washington, D.C.
European shares hit a 12-week low on Tuesday.
With weak U.S. jobs data last week also fueling talk the Federal Reserve could engage in another round of quantitative easing to prop up the world's biggest economy - which would in turn weigh on the dollar - investors are choosing the yen over the greenback, Doyle added.
The dollar sank as low as 80.68 yen, its weakest since early March, according to Reuters data. The greenback more recently traded at 80.77 yen, near the 50-day simple moving average of 80.78 yen.
"The move in the yen suggests participants had expected easing from the BoJ," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
"It is not off the table, however, and the BoJ may choose to ease policy at its meeting later this month," she added.
The euro also slumped against the yen, hitting an almost seven-week low of 105.51 before recovering slightly to trade off 1 percent to 105.75 yen.
Barclays expects the Bank of Japan to extend its asset purchase program, currently set to reach its limit at the end of the year, at the end of the April or before the middle of the year.
"As such, it would amount to an increase in the capacity for future easing, though perhaps not with an immediate easing effect."
By flooding markets with liquidity, asset purchase programs, or quantitative easing, are tantamount to printing money and diminish a currency's value.
SPANISH, ITALIAN YIELDS RISE
The euro recovered from earlier losses to trade nearly flat against the U.S. dollar. The single currency slipped 0.05 percent to $1.3093.
Spanish bonds have come under pressure recently as investors worry Spain could become the next source of contagion in the euro zone due to its weak fiscal position.
Better-than-expected German trade data failed to provide the euro with much support as investors remained focused on underperformance in the periphery.
"The market is looking at Europe and saying there is a recession in some economies. Germany is doing quite well, but is being dragged down by the others," said Gavin Friend, currency analyst at National Australia Bank.
Uncertainly about the prospects for the euro has fallen somewhat as reflected in the options market, with three-month risk reversals in the euro/dollar still biased for euro puts, trading at -2.3 vols on Tuesday, but improving from -3.5 vols in mid-February.
Euro/yen three-month risk reversals remained biased for euro puts, trading at -3.45 vols, down from -3.68 vols in early March.