* BOJ boosts asset buying by 10 trillion yen
* Yen regains ground versus dollar and euro
* Tensions over U.S. fiscal cliff take shine off euro
By Nia Williams
LONDON, Dec 20 (Reuters) - The yen rose on Thursday after the Bank of Japan loosened monetary policy, with the scale of asset buying disappointing some investors who had positioned for more aggressive easing.
Gains in the Japanese currency were expected to be limited, however, by bets the BOJ will loosen policy further next year.
The BOJ increased its asset buying by 10 trillion yen and said it would debate next month whether there is room to raise its inflation target, a move that could weaken the currency.
Traders took profits on recent bets against the yen, pushing the dollar down 0.5 percent to 83.96 yen and away from a 20-month high of 84.62 yen hit on Wednesday.
The dollar has gained more than 6 percent in the past five weeks on anticipation that Japan’s new government would push the BOJ to take more aggressive easing steps, and many market players said there was scope for further yen weakness ahead.
“The reaction in the market is one of modest disappointment. Expectations of aggressive BOJ easing have been running ahead of reality,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
“But there’s probably enough in the (BOJ) statement to keep market expectations for more aggressive easing alive so that will probably keep any rebound in the yen relatively modest.”
Hardman forecast the dollar to trade at 86 yen in 12 months time and the yen’s recent weakening trend was sustainable.
The yen also regained ground against the euro, with the single currency falling 0.5 percent to 111.09 yen and retreating from a 16-month high of 112.59 yen hit on Wednesday.
The euro steadied against the dollar at $1.3232, having slipped from an 8-1/2-month high of $1.33085 reached on Wednesday after German business confidence data beat market expectations.
The shared currency pulled back on signs of renewed tensions between U.S. policymakers in talks to resolve the so-called “fiscal cliff”, a combination of tax hikes and spending cuts due to kick in early next year that could tip the world’s largest economy into recession.
The Republicans announced plans to put an alternative tax plan to a vote in the House this week, prompting President Barack Obama to threaten to veto it, thereby unravelling the progress made over the last week.
If policymakers fail to reach a deal to avert the budget crisis, some analysts said the highly liquid dollar, seen as a safe haven by investors, could rally while currencies linked more to the global growth outlook, like the euro, may suffer.
“Market players were optimistic until a couple of days ago but now it looks like we may not get a Christmas present, or something even after the year-end,” a trader at a Japanese bank.
The growth-linked Australian dollar slipped to a one-week low of $1.0464, more than a full cent below last week’s three-month peak of US$1.0585, before recouping losses to last trade at $1.0494.
The New Zealand dollar slid to a 10-day low of U.S.$0.8330 after data showed the economy expanded by 0.2 percent in the third quarter, half the 0.4 percent expected by the market.