* Japan’s ruling coalition wins upper house majority
* Result broadly in line with expectations
* Yen dips initially but later bounces in choppy trade
By Anirban Nag
LONDON, July 22 (Reuters) - The yen rose on Monday as investors booked profits on earlier bets against the currency after Prime Minister Shinzo Abe’s decisive victory in elections for parliament’s upper house.
The election win, which was largely expected, may herald a rare bout of political stability in Japan and strengthens the mandate for Abe’s reflationary policies. Before the weekend elections, speculators had positioned for a drop in the yen and, with those short-term targets met, many booked profits.
Nevertheless, expectations are strong that the result will pave the way for the government to pursue pro-growth fiscal policies and structural reforms alongside the central bank’s aggressive monetary easing.
This may make the yen’s bounce temporary with a dip in the dollar seen as a buying opportunity, traders said.
“Almost everyone had positioned for Abe’s win so we are seeing a ‘buy-the-rumour and sell-the-fact’ kind of trading,” said Jeremy Stretch, head of currency strategy at CIBC.
“But dollar/yen is a buy on dips given part of the structural reform that Abe has to undertake is to make sure that the yen stays competitive. On the other side of the equation, you have the U.S. going through a cyclical recovery.”
The dollar was down 0.6 percent at 99.96 yen, having risen to 101.05 yen on trading platform EBS, its highest since July 10, in Asian trading. The dollar later lost steam and fell as low as 99.60 yen.
Even after Monday’s fluctuations, the dollar is up 15 percent versus the yen for the year as the Bank of Japan opted for unprecedented monetary stimulus to kick start the economy.
Analysts said the election result would also increase Japanese investor conviction about the success of the reforms, potentially driving them to seek higher yields overseas.
“Japanese portfolio outflows is what will drive the yen lower in coming months, supported by expectations of Fed tapering. Confidence from this victory can be constructive but these outflows will be a slow moving process,” said Ned Rumpeltin, head of G-10 FX strategy at Standard Chartered Bank.
”While in the near term we could still see some long dollar positions being trimmed, in the medium term we remain bearish of the yen. Abe has to walk the walk and satisfy sceptics who are questioning if he can deliver on structural reforms.
The euro was down 0.4 percent at 131.80 yen, having risen to a two-month high of 132.47 earlier.
The euro rose 0.3 percent to $1.3187, with investors relieved by a drop in Portuguese bond yields after President Anibal Cavaco Silva said on Sunday he wanted the centre-right coalition to stay in place to keep an international bailout on track.