The yen hit a seven-week peak against the dollar on Monday as short-term players chased it higher following a thumping win for the opposition Democratic Party in Japan's election, breaking chart supports for the greenback.
The yen edged up after the landslide election victory on Sunday, and then gathered pace as automatic dollar sell orders were triggered close to 93.00 yen per dollar, traders said.
Falling Chinese shares also prompted investors to buy the yen and sell other currencies perceived as risky, including higher-yielding Australian dollar.
"There were a few stale longs liquidated this morning, with dollar/yen and euro/yen selling," said a senior trader at a European bank in Hong Kong.
"Shanghai being down 5 percent has muddied the picture as well as to whether it's a reaction to the election victory or risk aversion. It's probably a bit of a combination of both."
The dollar fell around 1 percent to 92.56 yen, its weakest level since mid-July. The euro dropped 1.2 percent to 132.34 yen and edged lower 0.1 percent to $1.4287.
Traders said dollar/yen had broken chart levels around 93.00, triggering stop losses around 92.90, after Japanese exporters sold the dollar to repatriate overseas earnings at the month-end.
Japan's Nikkei share index erased an earlier jump to a 11-month high after the election victory for the Democrats and dropped 0.35 percent.
China's benchmark stock index extended losses and fell over 5 percent after losing 2.9 percent on Friday amid worries about a steep drop in Chinese bank lending in August.
NEW GOVERNMENT UNCERTAINTY
Investors are now waiting to see what policies the new Japanese government will follow and how it will differ from the old.
The Democrats' leader, Yukio Hatoyama, has said he would not name a cabinet until the new parliament had voted him in as prime minister but he is expected to set up a transition team quickly.
"The yen's firmness has been helped by hopes for a change, but how the DPJ-led government will work is unclear so the impact may not last too long," one senior trader for a Japanese bank said.
Democratic Party officials have said they would respect the independence of the Bank of Japan and are unlikely to intervene to weaken the yen, maintaining Japan's five-year absence from currency markets.
"There will be ups and downs in the dollar/yen ranges but we have to wait and see the new cabinet, especially who will take the finance minister's position," said a trader from a European bank in Tokyo.
Japan's industrial output rose 1.9 percent in July, the fifth straight monthly increase, as exports recover on the back of stimulus spending around the world, and the pace of rise is expected to accelerate in the coming months.
The rise in July output was less than the 2.3 percent gain in June but topped the 1.4 percent rise expected by economists.
