* Abe, new Japanese prime minister, vows to battle deflation * BoJ minutes show some called for action if economy worsens * Attention to shift back to U.S. "fiscal cliff" discussions By Wanfeng Zhou NEW YORK, Dec 26 The yen tumbled to a more than two-year low against the dollar and a 16-month trough versus the euro on Wednesday after Japan's new prime minister repeated his vow to battle deflation and a strong Japanese currency. Expectations that Shinzo Abe, who took office on Wednesday, will force the Bank of Japan to ease monetary policy further have caused steep losses in the yen, putting it on track for a drop of more than 10 percent this year, the biggest since 2005. Trading volume was light as many global financial centers remained closed for the Christmas holiday. All Group of 10 markets except Japan were closed on Tuesday, and only Japanese and U.S. markets were open on Wednesday. Abe promised aggressive monetary easing by the Bank of Japan and big fiscal spending by the debt-laden government to fight deflation and weaken the yen to make Japanese exports more competitive. Investors will wait to see if the talks will be backed by policy action. "Since the yen's sharp sell-off has come mostly from jaw-boning on the part of Mr. Abe, the yen could soon find its scope for further depreciation may slow in the absence of policy initiatives by the country's new administration," said Joe Manimbo, senior market analyst at Western Union Business Solutions, in Washington. The dollar rose as high as 85.70 yen on Reuters data, its strongest level since mid-September 2010, breaking through resistance at its 200-week moving average around 84.95 yen. It last stood at 85.61 yen, up 1 percent on the day. The yen also came under pressure after minutes of the Bank of Japan's November policy meeting released on Wednesday showed some board members considered policy options if the outlook for the economy and prices were to worsen. One board member even suggested that the BoJ commit to buying assets in an open-ended manner, without setting a strict deadline, until the central bank achieved its 1 percent consumer inflation target. Comments from Japanese Finance Minister Taro Aso that he was instructed by Abe to loosen the limits on bond issuance under the stimulus package also hit the yen.. Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York, said the yen could hit Abe's ultimate target of 90 yen to the dollar if he continues to keep pressure on the BoJ to loosen its stance further. The euro rose 1.3 percent to 113.22 yen, having risen as high as 113.39 yen, a 16-month high. Resistance is around the euro's 200-week moving average around 115.00 yen. The euro has not closed above that average since late September 2008. The U.S. dollar index was little changed at 79.607, with investors awaiting developments on the U.S. fiscal front. On Tuesday, it rose to 79.780, the highest since Dec. 14. President Barack Obama is due back in Washington early on Thursday for a final effort to negotiate a deal with Congress to avert or at least postpone the "fiscal cliff" of tax increases and government spending cuts set to begin next week. No specific bill dealing with the "cliff" was on the schedule of either the U.S. Senate or House of Representatives, which are expected to return on Thursday. "The safe harbor buck remained broadly in favor amid unease and worry that the U.S. economy might topple over the dreaded 'fiscal cliff' early next year if Washington can't reach a debt accord by Monday," Manimbo said. Against the dollar, the euro rose 0.3 percent to $1.3222 . Traders said the euro's gain was due to position adjustments going into the end of the year, with investors continuing to reduce short bets on the currency. "It has been year-end flows more than anything else for euro/dollar. It's extremely quiet and even small moves tend to get exaggerated," said Brian Daingerfield, currency strategist at RBS Securities in Stamford, Connecticut.