* Yen lifted by wave of short covering
* BOJ's bold policy decision leaves some wanting more
* Yen's recent downtrend still seen intact
* Aussie dollar eyes inflation data
By Ian Chua
SYDNEY, Jan 23 The yen held firm on Wednesday, having posted its biggest one-day gain in around eight months on the greenback as investors cut bearish bets on the currency following the Bank of Japan's latest move to spur the economy.
The BOJ, under intense political pressure to lift Japan out of recession, announced on Tuesday it would 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.
As a result, investors were quick to slash short positions in the yen, sending the dollar skidding to 88.75 yen from a 2-1/2 year high of 90.25. The fall of some 1 percent was the greenback's biggest one-day slide versus the yen since May.
Yet the dollar is still up 12 percent since October largely in anticipation of the BOJ's move.
The euro also declined by a similar margin to 118.20 yen , recoiling from a 20-month peak of 120.73 reached Friday.
Traders said the rebound in the yen could offer better levels to put on fresh bets against the currency, suspecting the BOJ will remain under pressure to inject more stimulus into the economy. This is particularly so if a more dovish governor takes over the helm in April, as is widely expected.
"The initial flurry of disappointment reflects the fact that so much anticipation surrounded the announcement, and the fact that in the very short term, this policy move changes little," said Kit Juckes, strategist at Societe Generale.
"Japan, like Oliver Twist, has been fed on a diet of thin gruel for a long time. However, I continue to believe that this move is consistent with the shift in attitude and in the direction of policy, which will deliver a higher USD/JPY level over the coming year, and an overshoot above 100 in due course."
The euro also saw a bit of volatility of its own after a newspaper reported that German regulator BaFin has ordered large banks to simulate a break-up.
But a closely watched survey showing German analyst and investor morale rose in January to highs not seen in more than 2-1/2 years provided some support.
The common currency last traded at $1.3322, having survived an initial fall to $1.3267.
With Europe's biggest economy showing signs of improving and Japan getting serious about reflation, investors were happy to scoop up growth-linked assets including commodity currencies.
That saw the Australian dollar advance to $1.0567, nearing a 4-month peak around $1.0600 set earlier in the year. The kiwi dollar climbed to $0.8410, edging closer to a 15-month high of $0.8477 touched last month.
The Aussie's immediate fortunes depend on inflation data due at 0030 GMT, with a tame number likely to keep alive diminished market expectations for an interest rate cut next month. This could briefly temper the Aussie's strength.
In Europe, a report on euro zone consumer confidence is due followed by U.S. home prices for November.