(Updates after Bank of England announcement)

* Yen falls on speculation BOJ will fund public spending directly

* BoE surprises market by holding fire on post-referendum rate cut

* Kiwi also hit by speculation of early rate cut

By Patrick Graham

LONDON, July 14 (Reuters) - The yen sank across the board on Thursday as the upbeat mood on global stock markets stretched into a sixth day and media reports stoked speculation the Bank of Japan could take steps to fund government spending directly.

Sterling jetted higher against the yen, the dollar and the euro after the Bank of England blew out expectations it would cut interest rates immediately to offset any damage to the economy from last month's vote to leave the European Union.

The New Zealand dollar also fell after central bankers there said they would issue an economic update before next month's policy meeting -- an unusual step read by some as a sign the Reserve Bank was preparing to cut rates.

But it was the yen's moves that dominated morning trading in London, sliding past 105 per dollar and 140 yen per pound, with dealers citing a Bloomberg report saying ex-Federal Reserve chief Ben Bernanke had raised the prospect of the BoJ issuing "perpetual bonds".

"We had this big move up at 7.30 this morning on the story about Bernanke floating this idea. It pushed the dollar through 105 yen and caught some stops along the way," said Alvin Tan, a strategist with Societe Generale in London.

"We've heard a lot of talk about fiscal policy out of Japan. Something will happen on that front. The big question is whether there will be further monetary easing and coordination of the two. That does seem possible."

The dollar gained 1.1 percent to 105.62 yen, hitting its highest level since late June.

If the government issued perpetual bonds directly to the BOJ, it could amount to the Bank funding government spending directly by printing new yen, for the first time shooting "helicopter money" directly at businesses and consumers.


Another of Prime Minister Shinzo Abe's advisers poured cold water on the idea in an interview with Reuters published after the Bloomberg story and government sources later outright denied perpetual bonds were being considered.

But with Abenomics widely considered to have failed so far, traders are wondering if the government and BOJ will come up with more radical monetary and fiscal stimulus measures soon.

That plays in to a broader world environment where central banks are again thinking more about stimulus than hopes the economy will prove strong enough to finally begin to put an end to the era of ultra-low interest rates and money-printing.

"It's the ideas here that are powerful," said Richard Benson, co-head of portfolio investment at currency fund Millennium Global. "Remember it took six months the first time for the details of Abenomics to come out, and in that time the dollar moved from 80 to 100 yen. So this may just be getting started."

The Bank of England decision was a shock to a market which had priced in at least an 80 percent chance of a cut on Thursday. But the rest of the Bank's commentary was dovish, pointing to a cut next month and the prospect of further steps that many expect to include another round of quantitative easing.

That should add up to a weaker pound, although SocGen's Tan argued that the prospect of longer-term support for growth was offering sterling some support. Half an hour after the decision sterling was up 1.7 percent at $1.3371, having peaked at a two-week high of $1.3480.

"There was an initial kneejerk but $1.35 saw significant resistance," said BMO Capital Markets currency strategist Stephen Gallo. "If the risk rally continues, we could be back up there tomorrow, but from a three-month perspective $1.35-1.36 is looking like a good place to sell the pound at the moment."

(Editing by Toby Chopra) ((patrick.graham@thomsonreuters.com)(+44207 542 9429)(patrick.graham.thomsonreuters.com@reuters.net))