By James Ramage 

The yen collapsed against the dollar and other currencies Friday after the Bank of Japan surprised markets by increasing its monthly asset purchases in an effort to boost the economy.

The dollar rocketed to 112.48 yen, the highest since Dec. 31, 2007, before subsiding to 112.15 yen in late trade, up 2.7%. It was the biggest one-day gain for the dollar since April 4, 2013, the day BOJ Gov. Haruhiko Kuroda announced the central bank's massive bond-buying program, known as quantitative easing. The dollar has risen 6.4% against the Japanese currency this year.

The euro dropped 0.7% against the dollar to $1.2531. Earlier in the session, the single currency fell to $1.2485, its lowest level in more than two years, as European data continued to disappoint. Germany, the euro bloc's strongest economy, reported far weaker retail sales for September than expected.

The Bank of Japan unexpectedly announced additional stimulus measures to push monthly asset purchases to 80 trillion yen, from the previous target range of 60 trillion yen to 70 trillion yen, to lift inflation toward its 2% target.

The move highlighted the commitment the BOJ and Prime Minister Shinzo Abe have made to lifting prices and to strengthening the economy, easing market worries. Investors had begun to question the government's resolve after a consumption tax that started in April slowed consumer demand.

Investors, many of whom were already betting on a weaker yen, welcomed the developments.

"Dr. Kuroda's surprise announcement significantly ups the ante on [quantitative easing] and essentially makes the yen a one-way bet," said Scott Minerd, global chief investment officer at Guggenheim Partners, LLC, which manages more than $220 billion. "Whether or not he succeeds in achieving his objectives, this is ultimately good for capital markets and will inflate asset prices."

The BOJ's resolve to battle deflation will resonate with investors using strategies that track macroeconomic trends, said Matthias Bouquet, global FX strategist at J.P. Morgan. In response to the BOJ move, strategists at J.P. Morgan predicted the dollar would rise to 120 yen by September 2015. The dollar last traded at that level in July 2007.

"This rally in dollar-yen will have legs," Mr. Bouquet said. "This will give more people reassurance of the BOJ's commitment."

Japan's move comes at a time when other central banks from New Zealand to Canada have been talking down their currencies. In light of global fears of low inflation, the BOJ's efforts could be a welcome sign, said Daniel Brehon, currency strategist at Deutsche Bank.

"If it leads to looser monetary policy around the world, that would be a good thing, given the deflationary pressures," Mr. Brehon said. "Central banks have done a lot but could always do more."

The falling yen will likely have significant influence on Asian currencies, Mr. Brehon said. South Korea could be encouraged to weaken the won to stay competitive, as it vies with Japan in exporting such products as cars and electronics.

The BOJ's announcement will likely add pressure on the European Central Bank to do more to ward off extremely low inflation in the eurozone, said Robert Tipp, chief investment strategist at Prudential Fixed Income, a unit of Prudential Financial Inc. The ECB enacted measures over the summer, including lowering interest rates and buying covered bonds, to boost the region's economy and consumer prices in particular, which measured an annual increase of just 0.4% in October.

The ECB officials "will have to broaden their array of securities they'll need to buy to get the psychological and monetary conditions they're looking for," Mr. Tipp said.

Write to James Ramage at james.ramage@wsj.com