The yen fell sharply on Wednesday after Japanese Prime Minister Yoshihiko Noda said he was ready to dissolve the lower house of parliament later this week and hold a snap election next month. With the main opposition Liberal Democratic Party (LDP), which favours further monetary policy easing by the Bank of Japan, leading in opinion polls, the prospect of an early election is regarded as negative for the currency.
LDP leader Shinzo Abe called on the central bank on Wednesday to print "unlimited yen" to achieve a new inflation target. The yen fell against the dollar and the euro as hedge funds and long-term investors such as asset managers sold, traders said. The dollar rose 0.9 percent to 80.12 yen and the euro climbed 1.2 percent on the day to 102.10 yen.
Noda told parliament he would be willing to dissolve the lower house on November 16 and hold elections in December if the opposition agreed to pass reforms to the electoral system. A senior lawmaker from his ruling Democratic party said an election was likely to be held on December 16.
"It is very likely the LDP will take over the lower house again and very clear they will be pressuring the BOJ to become more dovish as they have spoken about raising the inflation target," said Geoff Kendrick, currency analyst at Nomura. The LDP's Abe, a vocal critic of the BoJ, has called for a new 3 percent inflation target, three times the current goal, and for the bank to take bolder action to fight deflation.
"The financial markets can now begin to price more confidently the risk of more overt political pressure on the BOJ to rid Japan of deflation," Derek Halpenny, European head of global market research at Bank of Tokyo Mitsubishi, wrote in a note. He expected the yen to be under pressure in coming months. Investors are also worried the LDP may be less committed to fiscal belt-tightening measures such as planned tax hikes than Noda's party, adding to caution about the yen.
The yen aside, the dollar eased against most major currencies including the euro and the Swiss franc on growing signs that the Federal Reserve is likely to adopt an ultra-loose monetary stance in coming months. Influential Fed Reserve Vice Chair Janet Yellen said on Tuesday that US interest rates may need to stay near zero until early 2016 to forcefully lift employment.
The dollar index was slightly lower on the day at 81.061, having hit a two-month high of 81.241 on Tuesday. The euro was up 0.3 percent at $1.2735, helped by its gains against the yen. It has rebounded from a two-month low of $1.26610 on Tuesday on expectations that debt-laden Greece could receive aid worth roughly 44 billion euros at one go.