* Japan's ruling coalition wins upper house majority
* Result broadly in line with expectations
* Yen dips initially but later bounces in choppy trade
NEW YORK, July 22 The yen climbed on Monday after Japanese Prime Minister Shinzo Abe, as expected, won a decisive victory in elections for parliament's upper house, prompting some investors to sell dollar positions which had already priced in the win.
Abe's win may herald a rare bout of political stability in Japan and strengthens the mandate for his reflationary policies. 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. Speculators remained long the dollar against the yen going into the election and that was not forecast to change after Abe's win.
"The combination of 'sell the news dynamic' along with very illiquid summer markets in Asia caused a plunge in dollar/yen," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York. "With the focus on the Japanese election now over, attention will turn back to the U.S. and the direction of the pair for the rest of the week will likely be driven by US economic data."
The dollar was down 0.8 percent at 99.85 yen, closer to the session low of 99.61 than the session peak of 100.71 yen.
Even after Monday's fluctuations, the dollar is up around 15 percent versus the yen for the year as the Bank of Japan opted for unprecedented monetary stimulus to kick-start the economy. The yen remains the worst-performing currency year to date of the 36 most active currencies traded against the dollar, using Reuters data.
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 in London.
"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 131.46 yen, having risen to a two-month high of 132.43 earlier.
The euro rose 0.2 percent to $1.3163, 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.