By Karen Brettell

NEW YORK (Reuters) - The yen weakened on Thursday after Reuters reported that the Bank of Japan, under pressure from the Japanese government, was considering specific steps for expanding monetary stimulus on Friday to address signs of weakness in inflation.

Expectations of further stimulus in Japan has dominated trading for the past few weeks and increased yen volatility before the BOJ is due to conclude its two-day meeting on Friday.

“Everybody is waiting for the big marquee event of the week, which is the BOJ announcement tomorrow, to see exactly how large of a stimulus package they are going to put out,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

The Ministry of Finance has been lobbying hard for the BOJ to ease policy further and has prepared a statement it will publish in case the central bank eases.

"We welcome the BOJ's decision and will deploy all necessary policy steps including a scheduled big stimulus package," said a draft statement seen by Reuters.

The yen weakened to U.S. session lows of 105.50 on the report, from 104.79 earlier <JPY=>.

The yen had gained earlier on Thursday on expectations that the BOJ could disappoint investors.

High expectations for a large stimulus package were seen as likely to create large price swings on the BOJ announcement no matter what its content.

“I think volatility is almost guaranteed,” said Lou Brien, market strategist at DRW Trading in Chicago.

The price of hedging against big swings in the yen's exchange rate against the dollar over the next 24 hours surged on Thursday to its highest in eight years.

Japan's prime minister unveiled a surprisingly large 28 trillion yen ($265 billion) stimulus package on Wednesday, putting pressure on the central bank to match it with aggressive monetary easing.

Sources told Reuters on Thursday, however, that the government was planning direct fiscal spending of only 7 trillion yen, which could disappoint some market players expecting bigger outlays given the headline figure.

In Europe, the release of bank stress tests will also be a focus for investors on Friday, and in the United States investors will watch the first read of gross domestic product for the second quarter.

(Additional reporting by Jemima Kelly in London; Editing by Andrea Ricci and David Gregorio)