* Euro surges vs yen, holds steady vs dollar
* Most expect BOJ to ease policy at this week's meeting
* Keep long positions in 3-month dollar calls - Barclays
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, Dec 17 The yen slumped to its
lowest in over a year-and-a-half against the U.S. dollar on
Monday as part of a broad skid after Japan's conservative
Liberal Democratic Party, which is committed to aggressive
monetary easing, won a landslide victory.
The LDP surged back to power in Sunday's election, giving
ex-Prime Minister Shinzo Abe another chance to take the helm.
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.
"What remains to be seen is what policies will come next.
There is no mistake that Abe had clearly spoken out for steps
against deflation," said Kimihiko Tomita, head of foreign
exchange for State Street Global Markets in Tokyo.
Abe continued to do so on Monday, telling a news conference
that Japan needs a sizable supplementary budget to beat
deflation, given the country's output gap.
The dollar rose as far as 84.48 yen, reaching its
highest since April 2011, from around 83.50 yen late in New York
on Friday. The dollar last bought 84.04 yen, up about 0.7
percent, as profit-taking pared gains.
The euro jumped to around 111.30 yen from 109.81
yen, and last stood at 110.53 yen, up about 0.6 percent. The
next test is this year's high of 111.43 yen, with support said
to lie at Friday's session high of 109.98 yen.
The higher-yielding Australian dollar climbed
above 89.00 yen for the first time since May 2011, peaking at
89.01 yen before falling back to 88.50 yen.
Abe, who quit as premier in 2007 citing ill health, has
called for "unlimited" monetary easing and big spending on
public works to rescue the economy from its fourth recession
The Bank of Japan is scheduled to meet on Wednesday and
Thursday, and even before the election, most analysts expected
the central bank to ease policy further. The BOJ will most
likely increase its asset-buying and lending programme,
currently at 91 trillion yen, by another 5-10 trillion yen,
sources have said.
SHORT YEN BETS
Investors had already turned bearish on the yen in the weeks
leading up to the election on expectations of an LDP victory
based on polls.
Data from the Commodity Futures Trading Commission released
Friday showed short yen positions had risen to the highest in
over five years.
Strategists at Barclays recommend maintaining long positions
in three-month dollar/yen call options, due to the impending
stronger mandate for the BOJ to target higher inflation.
"Our estimates suggest a 10 percent multilateral nominal
(yen) depreciation would be needed to get a one-off inflation
boost of just 1.5 percent," they said in a note to clients.
But some other analysts and market participants warned the
yen may be poised for a short-term rebound, as Abe's actions are
likely to fall short of his tough talk, at least in the short
term, and the BOJ's easing steps are expected to trail those of
the U.S. Federal Reserve for now.
At its policy meeting last week, the U.S. Federal Reserve
announced a new round of monetary stimulus and took the
unprecedented step of indicating interest rates would remain
near zero until unemployment falls to at least 6.5 percent, a
long way from the 7.7 percent currently.
The CFTC data also showed currency speculators have turned
bearish in the U.S. dollar for the first time since late
That has helped underpin the euro, which was around $1.3155
in Asian trade, steady from its levels late in New York
The dollar index was slightly higher at 79.668,
maintaining a foothold above support around 79.53-79.60. A
sustained break of 79.50 would open a test of the October low of
In addition to this week's BOJ meeting, investors will be
closely watching for progress in the U.S. budget stalemate, to
avert the "fiscal cliff" of $600 billion worth of tax increases
and spending cuts scheduled to take effect next month, that
economists fear could top the U.S. economy back into recession.
President Barack Obama is not ready to accept a new offer
from the Republican leader of the U.S. House of Representatives
to raise taxes on top earners in exchange for major cuts in
entitlement programs, a source said late on Saturday.