The yen jumped to a two-week high against the dollar on Monday as investors saw a poor showing by Japan's ruling Liberal Democratic Party (LDP) in upper house elections as not affecting economic reform.
Prime Minister Junichiro Koizumi's LDP won 49 of 121 seats at stake on Sunday, missing a modest target of 51 but avoiding the worst-case scenario of winning less than 44, final media projections showed.
Dealers said the yen's rise was mainly driven by foreign investors, who viewed the result as better than expected for the LDP, and were banking on Japanese stock prices to rise on the prospect that reform-minded Koizumi would keep his job.
"Some investors are buying back the yen after they had sold heavily last week on the expectation the result would be worse," said Tohru Sasaki, strategist at J.P. Morgan Chase.
"They've been encouraged by the fact it looks like Koizumi won't have to take responsibility."
The Nikkei stock average rose around one percent in early trade, bouncing back after falling more than 2.5 percent last week.
The dollar fell to around 107.59 yen, its lowest level since June 28, before settling at 107.70 as of 0050 GMT.
It fetched around 108.35 yen late in Friday's New York session.
The euro was at $1.2395, slightly below the late US level.
The Japanese ruling coalition kept its majority in the upper house.
It also holds a majority in the more powerful lower chamber, which chooses the prime minister. Analysts had said that Koizumi would likely stay on as long as the LDP won more than 44 seats.
Foreign investors, who have led the Tokyo stock market's 40 percent rebound since April 2003 and an accompanying rise in the yen, were also encouraged by projections that Economics Minister Heizo Takenaka had won a seat as an LDP candidate.
Takenaka is an academic drafted into the cabinet and a symbol of economic reform.
Analysts said that with the election out of the way, attention would likely return to Japan's improving economic fundamentals, which are seen supporting the yen.
"The market has been very focused on the election, but we've seen a lot of good data go unrewarded lately ... The yen could start strengthening again and test 106 (to the dollar) this week," said Naomi Fink, senior currency strategist at BNP Paribas.
Fink said the market had probably not yet priced in last week's upbeat household spending data, and machinery orders figures that showed a slight drop in orders for May but reinforced views that Japan's economic recovery remained strong.
The market showed little reaction to Finance Ministry data that showed the surplus in Japan's current account was up 23.8 percent in May from a year earlier, higher than the 11.9 percent rise forecast by economists in a Reuters poll.
Other data showed that foreigners were net buyers of Japanese shares in June to the tune of 874 billion yen ($8.12 billion), compared with net sales of 52.6 billion yen in May.
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