* Dollar/yen may dip after BOJ rate decision on Thurs
* But trend of yen weakness seen likely to persist
* Euro holds ground on hopes of ‘fiscal cliff’ progress
By Masayuki Kitano and Lisa Twaronite
SINGAPORE/TOKYO, Dec 18 (Reuters) - The yen edged lower and neared a 20-month low versus the dollar on Tuesday, dogged by expectations that a new Japanese government would nudge the Bank of Japan toward more drastic monetary stimulus.
The yen had skidded to its lowest level in over a year and a half on Monday after Japan’s conservative Liberal Democratic Party (LDP), which is committed to aggressive monetary easing, won a landslide election victory.
While the yen could find some support in the near term if position squaring sets in, traders and analysts said the yen’s downtrend was likely to remain in place.
“There is a good chance that the yen weakness may persist, especially heading into the end of the first quarter (of 2013),” said Sim Moh Siong, FX strategist for Bank of Singapore.
A focal point will be a forthcoming change in BOJ leadership and the implications for monetary policy, he said.
“It’s more of an expectation that the BOJ’s conservative character could change,” he added.
Japan’s next prime minister Shinzo Abe wants someone more in tune with his expansionary thinking to replace BOJ governor Masaaki Shirakawa when his term expires in April. In addition, two deputy governor posts are opening up in March.
Abe is set to form his cabinet on Dec. 26.
The dollar edged up 0.2 percent to 84.07 yen, nearing a high of about 84.50 yen that had been hit on Monday, the greenback’s strongest level against the yen since April 2011.
The dollar retreated on Monday after hitting that 20-month peak against the yen, but the pull-back was relatively shallow.
“The corrective fall in the dollar/yen after the election was small and it’s crawling up because the yen weakening trend is still intact,” said Yuji Saito, director of the foreign exchange department in Tokyo at Credit Agricole Corporate & Investment Bank.
The yen had slid on Monday after the LDP 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.
Market players said the dollar could come under pressure and the yen could edge higher in the near term, especially after the Bank of Japan’s interest rate decision due on Thursday following a two-day policy meeting.
“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 in Singapore.
“The actual hurdle to impressing the market is now quite high,” Berry said, referring to how the dollar had fallen against the yen right after the BOJ expanded its asset buying scheme by 11 trillion yen on Oct. 30.
Most analysts expect the central bank to ease policy further this week, and sources familiar with the BOJ’s thinking have said that 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.
Saito at Credit Agricole said profit-taking ahead of year-end holidays was likely to weigh on the dollar once the BOJ meeting is over, adding that the dollar could then drop by 1-2 yen.
The euro edged up 0.1 percent to $1.3172, hovering near a high of $1.3191 touched in the previous session, its highest in more than seven months, according to Reuters data.
The euro was supported by an improvement in risk appetite on hopes of a progress on the U.S. budget stalemate. U.S. President Barack Obama and top Republican John Boehner met at the White House on Monday to discuss how to avert tax hikes and spending cuts that economists fear could push the economy into recession.
The euro mostly shrugged off comments on Monday from European Central Bank President Mario Draghi, who reiterated concerns over slow growth of Europe’s economy.
“It seems that policymakers are still worried about the eurozone’s economic outlook but euro/dollar continues to hold steady thanks to the rally in equities and the Federal Reserve’s balance sheet expansion,” said BK Asset Management managing director Kathy Lien in a research note.
At its policy meeting last week, the U.S. Federal Reserve announced a new round of monetary stimulus steps.