* Trend of yen weakness likely to persist
* Yen may win short-term reprieve from BOJ decision
* Euro steady near 7-1/2 month high versus dollar
By Anirban Nag
LONDON, Dec 18 (Reuters) - The yen slipped on Tuesday, trading near a 20-month low against the dollar on expectations that a new Japanese government will drive the Bank of Japan toward more aggressive monetary easing.
While the yen could find some support in coming days if investors and speculators trim large bets against it, traders said it was likely to trend lower in the medium term.
The dollar edged up 0.1 percent to 83.95 yen, having hit a high of 84.48 yen on Monday, the U.S. currency’s strongest level against the yen since April 2011. Traders cited option barriers at 84.50 yen with stop loss buy orders above that level.
The yen fell on Monday after the Liberal Democratic Party surged back to power in an election on Sunday. 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.
The next prime minister, Shinzo Abe, wants someone more in tune with his expansionary thinking to replace BOJ chief Masaaki Shirakawa when his term expires in April. In addition, two deputy governor posts are opening up in March.
“We are in a situation where we will see the government tell the central bank what to do. Such a politicised situation is never good for a currency and the yen will weaken,” said Peter Kinsella, currency strategist at Commerzbank.
“Apart from the politics, the economic data from Japan has not been good. This should see quite aggressive easing from the BOJ. We are forecasting 90 yen over the coming year.”
Abe reiterated his calls for the BOJ to set a higher inflation goal, saying on Tuesday that he has asked Shirakawa to consider establishing a 2 percent inflation target. That would be twice the BOJ’s current goal and would mean more monetary policy easing.
Several sources familiar with the BOJ’s thinking have said the central bank will consider no later than January whether to adopt a 2 percent target.
“There is a good chance that the yen’s weakness may persist, especially heading into the end of the first quarter (of 2013),” said Sim Moh Siong, FX strategist for Bank of Singapore.
Analysts said the dollar could come under pressure and the yen edge higher in the near term, especially if the BOJ disappoints those expecting more aggressive monetary easing after a two-day policy meeting ending on Thursday.
Speculators have sold the yen on expectations the BOJ could adopt a more aggressive asset buying programme. But sources familiar with the BOJ’s thinking have said the most likely option is for the central bank to increase its asset-buying and lending programme, currently at 91 trillion yen, by another 5-10 trillion yen.
That would fall short of expectations and could lead to some of the large short yen positions being cut.
“It’s likely that they will not ease enough for the market’s satisfaction and we should see a little pull-back on that,” said Gareth Berry, G10 FX strategist for UBS.
The euro was steady against the yen at 110.45 yen and against the dollar at $1.3165, hovering near a high of $1.3192 hit on Monday, its highest in more than seven months.
The euro was supported by signs of progress in U.S. budget talks. At stake are steep tax hikes and spending cuts that are due to take effect early in 2013, which could push the U.S. economy into recession and hurt demand for assets like stocks and currencies like the euro and the Australian dollar.
The Swedish crown rose against the euro to 8.7300 per euro after the Riksbank cut its repo rate by 25 basis points, as expected, and said rates would remain on hold for some time.