* BOJ eases, but still disappoints markets
* Yen surges, bond yields rise
* European financials rally
By Jamie McGeever
LONDON, July 29 (Reuters) - The yen jumped on Friday and the biggest rise in Japanese government bond yields in years lifted sovereign borrowing costs around the world, after the Bank of Japan's latest measures to boost growth and inflation fell short of investor expectations.
Investors also digested a heavy slew of European corporate earnings dominated by some of the region's biggest banks and awaited the first estimate of second-quarter U.S. growth.
The dollar's fall against the yen, its steepest in a month and fourth steepest this year, pulled it down against other currencies, putting the trade-weighted dollar exchange rate on course for its biggest weekly fall in two months.
Stocks absorbed the BOJ's decision a little more easily, in part because the central bank increased the purchases of exchange-traded funds (ETFs) in its easing package. Japan's Nikkei rose, and European indices rose on the back of better-than-expected results from Barclays and UBS .
"That the BOJ did not increase bond purchases is significant and will disappoint those looking for coordination of monetary and fiscal easing," said Adam Cole, head of currency strategy at RBC Capital Markets.
"While the increase in ETF purchases is helpful, it still makes up a very small part of the overall easing package," Cole said, noting that the BOJ has left the door open to more easing but will be unable to prevent the yen from rallying further.
The BOJ modestly increased purchases of ETFs, but maintained its base money target at 80 trillion yen ($775 billion) and the pace of purchases of other assets, including Japanese government bonds.
The central bank also held at 0.1 percent the interest it charges to a portion of excess reserves financial institutions leave with the central bank.
The dollar fell 1.8 percent to 103.35 yen, its biggest one-day decline since June 24 - the day after the UK's decision to leave the European Union - having earlier fallen below 103.00.
The dollar index fell 0.4 percent to 96.33, while the euro inched up 0.2 percent to just under $1.11.
Japan's 10-year bond yield soared 10 basis points to -0.17 percent, on course for its biggest one-day rise since April 2008.
BANKS RISE
Japan's Nikkei, which swung in and out of the red after the announcement, closed up 0.56 percent at 16,569 points. The index, which touched a seven-week high last week, rose 6.4 percent in July, its best month since October last year.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.64 percent, sliding back from its highest level since Aug. 11 struck earlier in the day.