* Yen three-day gain best since June 2012 * Long-term yen weakness to resume * Strategists say LTRO repayment could lift euro By Gertrude Chavez-Dreyfuss NEW YORK, Jan 23 (Reuters) - The yen edged higher against the dollar and euro on Wednesday, gaining for a third straight day, still benefiting from the Bank of Japan's monetary easing that fell short of expectations. The euro, meanwhile, drifted higher against the dollar. Overall, sentiment towards euro zone assets continued to improve and investors positioned for euro-area banks to repay part of the loans taken from the European Central Bank last year. The yen, on the other hand, has risen 1.9 percent versus the dollar the last three days, the best three-day gain in seven months. The move to end years of economic stagnation, which included a pledge to double its inflation target to 2 percent --its boldest action yet -- but it had already been priced in by markets and fell short of lofty expectations for a faster, substantial stimulus boost. "The yen's rally is an extension from yesterday's post-BoJ gains," said Greg Moore, currency strategist at TD Securities in Toronto. "A lot of what the BoJ announced yesterday has already been priced in and there were a lot of potential issues about some of its targets." The dollar fell 0.1 percent to 88.58 yen, off a 2-1/2 year high of 90.25 yen on Monday. The U.S. currency is still up around 11 percent against the yen from mid-November. After weeks of intense speculation that weighed on the yen, some market players were a bit disappointed by the BOJ's decision that its open-ended commitment to buying assets would come into effect only next year. Strategists said while the yen would likely resume its overall trend and fall across the board, investors would refrain from betting against considerable yen weakness right away. TD's Moore said he doesn't forsee the dollar falling much from current levels, adding that the currency pair would likely trade in the "high 80s to low 90s". A change in BOJ leadership in April is expected to weigh on the yen, given prospects for Prime Minister Shinzo Abe to appoint a governor favouring more aggressive monetary easing. Analysts saw the yen weakening over the medium term, based on expectations the BOJ will remain under pressure to inject more stimulus into the economy, possibly pushing the dollar to 100 yen, a level last seen in April 2009. EURO STRENGTH The euro slipped against the yen to 118.05 yen, with three-day losses at 1.5 percent. Against the dollar, it edged up 0.1 percent to $1.3333 , holding within sight of last week's 11-month high of $1.3404. Market players reported bids at $1.3275-85. The euro has been buoyed by receding fears about the debt crisis, highlighted by European Central Bank president Mario Draghi comments on Tuesday that the euro zone could begin 2013 with more confidence. While strong German economic data on Tuesday lent some support to the euro, strategists said if the euro zone's flash Purchasing Managers' Index figures due on Thursday beats forecasts, the euro could break above the $1.34 level. Some analysts said the euro could rise before an announcement on Friday on the size of next week's first repayments of three-year loans taken by banks from the ECB a year ago. That is likely to lead to some shrinking of the ECB's balance sheet at a time when the Federal Reserve and the BOJ are still expanding theirs. Balance sheet expansion usually hurts a currency, so a repayment to the ECB should help the euro especially against the dollar and the yen, traders said. "If (the repayment) is of a substantial size it would confirm the systemic risks in euro zone are fading further...that could be positive for the euro," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets. Banks took more than one trillion euros in ultra-cheap LTRO (loan-term refinancing operation) loans from the ECB. A Reuters poll showed traders expected around 100 billion euros to be paid back next week.