LONDON: The yen pushed higher against the euro and dollar on Wednesday, extending gains from the previous day, when monetary easing from Bank of Japan fell short of some expectations for faster, more aggressive action.
Weakness against the yen also dragged the euro lower against the dollar, although losses were limited after a much stronger-than-expected German economic sentiment survey on Tuesday.
Citi strategists said in a note that comments from Michael Meister, a senior member of German Chancellor Angela Merkel's party, indicating Germany may retaliate if the Japanese efforts to cheapen the yen continue had also weighed on the euro.
After weeks of intense speculation that weighed heavily on the yen, some market players were underwhelmed by the BOJ's pledge to double its inflation target and switch to an open-ended commitment to buying assets next year.
While the move to end years of economic stagnation was the bank's boldest action yet, it had been widely leaked to the media and fell short of lofty market expectations for an immediate substantial stimulus boost.
The dollar fell 0.4 percent to 88.38 yen, retreating from a 2-1/2 year high of 90.25 yen on Monday. The US currency is still up around 11 percent against the yen from mid-November.
"The BoJ meeting was marginally disappointing so there is a bit of profit-taking going on," said Geoff Kendrick, currency strategist at Nomura.
"Our view is that we will get stuck below 90 yen but probably go no lower than 87 until we get more news, which will not come out until we find out who the new (BOJ) governor is."
A forthcoming change in BOJ leadership is expected to weigh on the yen, given expectations for Prime Minister Shinzo Abe to appoint a governor favouring loose monetary policy. Current governor Masaaki Shirakawa's term ends in April.
The euro fell 0.7 percent to 117.36 yen, pulling away from a 20-month peak of 120.73 yen reached on Friday.
Still, many analysts saw the yen weakening over the medium- to longer-term, based on expectations the BOJ will remain under pressure to inject more stimulus into the economy.
"I continue to believe that this (BOJ) move is consistent with the shift in attitude and in the direction of policy, which will deliver a higher dollar/yen level over the coming year, and an overshoot above 100 in due course," said Kit Juckes, FX strategist at Societe Generale.
LTRO REPAYMENT AHEAD
The euro dipped 0.1 percent against the dollar to $1.3305, holding within sight of last week's 11-month high of $1.3404. Market players reported supporting bids at $1.3275-85.
Some strategists said the euro would find some support ahead of an announcement on Friday on the size of next week's first repayments of three-year loans taken by banks from the European Central Bank a year ago.
Banks took more than 1 trillion euros in ultra-cheap LTRO (loan-term refinancing operation) loans from the ECB. A Reuters poll showed traders expected about 1 billion euros to be paid back next week. [ID;nL4N0AQ4D0]
Nomura's Kendrick said investors would see the repayments as a move to tighten monetary policy by the ECB, in sharp contrast to the US Federal Reserve and BOJ asset purchase schemes.
"Relative to other central banks the ECB is at least flatlining and at best shrinking its balance sheet. We will wait for the LTRO repayment and if that's a bigger number than expected euro may break the highs around $1.34," he said.
Deutsche Bank strategists said in a note they viewed the LTRO repayments as a major positive for the euro, and were targeting a break above $1.35.