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's 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. 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.
The dollar edged up 0.1 percent to 83.99 yen, not very far from a high of 84.48 yen that had been hit on Monday, the greenback's strongest level against the yen since April 2011. Abe reiterated his calls for the BOJ to set a higher inflation goal, saying on Tuesday that he has asked Shirakawa to consider establishing a 2 percent inflation goal. That would be twice the BoJ's current inflation goal of 1 percent. Several sources familiar with the BoJ's thinking have said the central bank will consider no later than January whether to adopt a 2 percent inflation target.
The yen 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.
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. The euro edged up 0.1 percent to $1.3170, 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 progress in talks aimed at avoiding the US "fiscal cliff".