* Japan’s ruling coalition wins upper house majority
* Result was broadly in line with expectations
* Yen dips initially but later bounces in choppy trade
By Anirban Nag
LONDON, July 22 (Reuters) - The Japanese yen was stronger on Monday, recovering from early losses that followed news of Prime Minister Shinzo Abe’s decisive victory in elections for parliament’s upper house.
The election win - which was priced in to markets - provided a rare bout of political stability in Japan and a stronger mandate for Abe’s his reflationary economic policies.
Expectations are strong that this result will pave the way for his government to pursue pro-growth fiscal policies and structural reforms to go alongside the central bank’s aggressive monetary easing.
All of which makes the yen’s rebound a temporary one with a dip in the dollar seen as a buying opportunity, traders said.
“Almost everyone had positioned for Abe’s win so we are seeing a ‘buy-the-rumour and sell-the-fact’ kind of trading,” said Jeremy Stretch, head of currency strategy at CIBC.
“But dollar/yen is a buy on dips given part of the structural reform that Abe has to undertake is to make sure that the yen stays competitive. On the other side of the equation, you have the U.S. going through a cyclical recovery.”
The dollar was down 0.6 percent at 99.96 yen, having risen to 101.05 yen on trading platform EBS, its highest level since July 10, in Asian trading. The dollar lost steam after that and saw a sharp reversal, falling to as low as 99.60 yen. Stop-loss sell orders are cited at 99.50 yen.
Even after Monday’s fluctuations, the dollar is up 15 percent versus the yen for the year as the Bank of Japan opted for unprecedented monetary stimulus to kick start the economy.
Analysts said the election result would also see Japanese investors become more convinced about the success of the reform process. That could lead to change in investor behaviour and drive them to seek higher yields overseas, including the euro zone, in coming months.
For now though, the euro was down 0.5 percent at 131.53 yen , having risen to a two-month high of 132.47 earlier.
Jeffrey Halley, FX trader for Saxo Capital Markets, said Japanese players were spotted selling the dollar versus the yen in the Asian session, adding that traders using algorithmic trading also joined in with yen-buying.
“This has pushed into more stop-losses on dollar/yen and euro/yen in very poor liquidity conditions,” Halley said.
Against the dollar, the euro was flat at $1.3155 with investors keeping an eye on developments in Portugal. Portuguese President Anibal Cavaco Silva on Sunday ruled out a snap election and said he wanted the centre-right coalition to stay in place to keep an international bailout on track.
That eased some of the tension building up in southern European bonds and follows the collapse of “national salvation” talks on Friday between the coalition and the opposition Socialists to reach a deal on the country’s bailout programme.