* BOJ boosts asset buying by 10 trln yen
* It will review policy goal as wanted by new leader
* Tension over U.S. fiscal cliff helps yen, hurts euro
By Hideyuki Sano
TOKYO, Dec 20 (Reuters) - The yen firmed on Thursday after the Bank of Japan, as expected, eased monetary policy, increasing its asset purchases by 10 trillion yen and saying it would review its policy goal in a likely move towards adopting an inflation target.
With expectations matched, traders took profits on their bets against the yen, with the end-year holiday period approaching, and the dollar fell 0.45 percent on the day to 84.00 yen.
On Wednesday, the dollar hit a 20-month high of 84.62 yen, gaining more than six percent in the past five weeks on anticipation that Japan’s new government would push the BOJ to take more aggressive easing steps.
In a move seen as an attempt to placate incoming prime minister Shinzo Abe, who has called for unlimited easing to achieve 2 percent inflation, the BOJ also said it would review its stance on price stability. At present, the BOJ has a less explicit “goal” of 1 percent inflation.
While profit-taking ahead of holiday seasons is likely to cap the dollar/yen for now, traders said the yen is likely to remain handicapped by expectations that the BOJ will pushed by the government into printing more money.
Some analysts said the BOJ’s new funding scheme to support lending, while less noticed in markets than other measures, potentially could weaken the yen.
The BOJ said it would provide unlimited funds to match any increase in lending by banks -- in any currencies and anywhere in the world.
“The BOJ is saying it will provide funds if investors want to invest in foreign bonds... This does nothing when markets are risk-off but as soon as markets become risk-on, this is going to have a huge impact and will speed up fall in the yen,” said Seiya Nakajima, chief economist at Itochu Corp.
The euro stood at 111.32 yen, down about 0.45 percent from late U.S. levels and off a 16-month high of 112.59 yen hit on Wednesday.
The euro also slipped on the dollar slightly to $1.3213 , having slipped from an 8-month high of $1.33085 reached on Wednesday after German business confidence data beat market expectations.
The euro had gained earlier thanks to a fall in southern European countries’ bond yields.
But it later gave up gains against the dollar, while the yen also rebounded from multi-month lows, as talks to resolve the U.S. fiscal impasse appeared to take a turn for the worse.
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 should Congress approve, threatening to unravel progress made over the last week.
“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 Australian dollar took a hit as well, slipping to one-week lows of $1.0464 to stand more than a full cent below last week’s three-month peak before recouping losses to last trade at $1.0483.
Also under pressure, the New Zealand currency slid to a near two-week low around $0.8330 after data showed the economy slowed more than expected in the third quarter.
Gross domestic product expanded a mere 0.2 percent in the quarter, half of market expectations. There was a downward revision of second-quarter growth to 0.3 percent.
“It means there’s more chance of a rate cut than a hike in 2013, but our base case remains steady policy for a long time to come,” said Michael Turner, strategist, RBC Capital Markets.