SINGAPORE/TOKYO: The yen edged lower and neared a 20-month low versus the dollar on Tuesday, dogged by expectations that a new Japanese government would nudge the Bank of Japan toward more drastic monetary stimulus.
The yen had skidded to its lowest level in more than a year-and-a-half on Monday after Japan's conservative Liberal Democratic Party (LDP), which is committed to aggressive monetary easing, won a landslide election victory.
While the yen could find some support in the near term if position squaring sets in, traders and analysts said the yen's downtrend was likely to remain in place.
"There is a good chance that the yen's weakness may persist, especially heading into the end of the first quarter (of 2013)," said Sim Moh Siong, FX strategist for Bank of Singapore.
A focal point will be a forthcoming change in BOJ leadership and the implications for monetary policy, he said.
"It's more of an expectation that the BOJ's conservative character could change," he added.
Japan's next prime minister Shinzo Abe wants someone more in tune with his expansionary thinking to replace BOJ governor Masaaki Shirakawa when his term expires in April. In addition, two deputy governor posts are opening up in March.
The dollar edged up 0.1 percent to 83.99 yen, not very far from a high of 84.48 yen that had been hit on Monday, the greenback's strongest level against the yen since April 2011.
Abe reiterated his calls for the BOJ to set a higher inflation goal, saying on Tuesday that he has asked Shirakawa to consider establishing a 2 percent inflation goal. That would be twice the BOJ's current inflation goal of 1 percent.
Several sources familiar with the BOJ's thinking have said the central bank will consider no later than January whether to adopt a 2 percent inflation target.
The yen slid on Monday after the LDP surged back to power in an election on Sunday. The LDP and its ally, the New Komeito party, secured the two thirds majority needed to overrule parliament's upper house, meaning the new government has a greater chance of pushing though its policies.
BOJ RATE DECISION
Market players said the dollar could come under pressure and the yen could edge higher in the near term, especially after the Bank of Japan's interest rate decision due on Thursday following a two-day policy meeting.
"It's likely that they will not ease enough for the market's satisfaction and we should see a little pull-back on that," said Gareth Berry, G10 FX strategist for UBS in Singapore.
"The actual hurdle to impressing the market is now quite high," Berry said, referring to how the dollar had fallen against the yen right after the BOJ expanded its asset buying scheme by 11 trillion yen on Oct. 30.
Most analysts expect the central bank to ease policy further this week, and sources familiar with the BOJ's thinking have said that the most likely option is for the central bank to increase its asset-buying and lending programme, currently at 91 trillion yen, by another 5-10 trillion yen.
The euro edged up 0.1 percent to $1.3170, hovering near a high of $1.3191 touched in the previous session, its highest in more than seven months, according to Reuters data.
The euro was supported by an improvement in risk appetite on hopes of progress in talks aimed at avoiding the US "fiscal cliff". At issue are steep tax hikes and spending cuts that are due to take effect early in 2013, which economists fear could push the US economy into recession.
The differences over how to resolve the "fiscal cliff" narrowed significantly Monday night as President Barack Obama made a counter-offer to Republicans that included a major change in position on tax hikes for the wealthy, according to a source familiar with the talks.
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