* Euro surges vs yen, holds steady vs dollar
* Most expect BOJ to ease policy at this week’s meeting
* Keep long positions in 3-month dollar calls - Barclays
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, Dec 17 (Reuters) - The yen slumped to its lowest in over a year-and-a-half against the U.S. dollar on Monday as part of a broad skid after Japan’s conservative Liberal Democratic Party, which is committed to aggressive monetary easing, won a landslide victory.
The LDP surged back to power in Sunday’s election, giving ex-Prime Minister Shinzo Abe another chance to take the helm. 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.
“What remains to be seen is what policies will come next. There is no mistake that Abe had clearly spoken out for steps against deflation,” said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
Abe continued to do so on Monday, telling a news conference that Japan needs a sizable supplementary budget to beat deflation, given the country’s output gap.
The dollar rose as far as 84.48 yen, reaching its highest since April 2011, from around 83.50 yen late in New York on Friday. The dollar last bought 84.04 yen, up about 0.7 percent, as profit-taking pared gains.
The euro jumped to around 111.30 yen from 109.81 yen, and last stood at 110.53 yen, up about 0.6 percent. The next test is this year’s high of 111.43 yen, with support said to lie at Friday’s session high of 109.98 yen.
The higher-yielding Australian dollar climbed above 89.00 yen for the first time since May 2011, peaking at 89.01 yen before falling back to 88.50 yen.
Abe, who quit as premier in 2007 citing ill health, has called for “unlimited” monetary easing and big spending on public works to rescue the economy from its fourth recession since 2000.
The Bank of Japan is scheduled to meet on Wednesday and Thursday, and even before the election, most analysts expected the central bank to ease policy further. The BOJ will most likely increase its asset-buying and lending programme, currently at 91 trillion yen, by another 5-10 trillion yen, sources have said.
Investors had already turned bearish on the yen in the weeks leading up to the election on expectations of an LDP victory based on polls.
Data from the Commodity Futures Trading Commission released Friday showed short yen positions had risen to the highest in over five years.
Strategists at Barclays recommend maintaining long positions in three-month dollar/yen call options, due to the impending stronger mandate for the BOJ to target higher inflation.
“Our estimates suggest a 10 percent multilateral nominal (yen) depreciation would be needed to get a one-off inflation boost of just 1.5 percent,” they said in a note to clients.
But some other analysts and market participants warned the yen may be poised for a short-term rebound, as Abe’s actions are likely to fall short of his tough talk, at least in the short term, and the BOJ’s easing steps are expected to trail those of the U.S. Federal Reserve for now.
At its policy meeting last week, the U.S. Federal Reserve announced a new round of monetary stimulus and took the unprecedented step of indicating interest rates would remain near zero until unemployment falls to at least 6.5 percent, a long way from the 7.7 percent currently.
The CFTC data also showed currency speculators have turned bearish in the U.S. dollar for the first time since late October.
That has helped underpin the euro, which was around $1.3155 in Asian trade, steady from its levels late in New York Friday.
The dollar index was slightly higher at 79.668, maintaining a foothold above support around 79.53-79.60. A sustained break of 79.50 would open a test of the October low of 78.94.
In addition to this week’s BOJ meeting, investors will be closely watching for progress in the U.S. budget stalemate, to avert the “fiscal cliff” of $600 billion worth of tax increases and spending cuts scheduled to take effect next month, that economists fear could top the U.S. economy back into recession.
President Barack Obama is not ready to accept a new offer from the Republican leader of the U.S. House of Representatives to raise taxes on top earners in exchange for major cuts in entitlement programs, a source said late on Saturday.