NEW YORK (Reuters) - The yen soared 1 percent against the dollar and euro on Tuesday after the Bank of Japan said its open-ended commitment to buy assets would kick in only next year, disappointing those who had expected more aggressive monetary easing.
But the euro pared some losses against the yen and recovered versus the dollar after a German ZEW survey showed that economic sentiment was at the highest since May 2012.
The common currency had fallen to a session low against the dollar and yen on speculation that some large German banks could be asked to split their investment banking operations, driving European shares lower.
But the biggest mover was the yen, with the Bank of Japan once again falling short of expectations. The yen rose in the aftermath, even as some traders said the move higher would be limited.
"A dominate yen outshined its rivals after actions by the Bank of Japan were considered by many to be underwhelming and disappointing," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Japan's central bank, which has been under intense political pressure to overcome deflation, doubled its inflation target to 2 percent, as had been widely expected.
It also said it had decided to switch to an open-ended approach of buying a certain amount of assets each month next year, without setting a deadline for completing the purchases.
The dollar was down 0.9 percent against the yen at 88.74. Earlier, it had fallen past reported stops at 88.50 yen to hit a session low of 88.35.
Traders cited bids at 88.00-88.20 yen while chart support was at the January 16 low. The dollar had risen to 90.06 yen immediately after the BOJ decision, not far from its 2-1/2-year high of 90.25 yen, but later retreated.
The yen's recovery was likely to be short-lived and the dollar would rise against the yen in the coming months, analysts said.
"The general upward move in dollar/yen will continue due to expectations of more easing after a new BoJ governor is appointed in April," said Bernd Berg, global FX strategist at Credit Suisse, adding that the dollar could rise to 92 yen in the next few months.
Current BoJ Governor Masaaki Shirakawa's term ends in April and markets are positioned for further yen weakness as most expect him to be replaced by someone whose stance on aggressive policy easing matches that of Prime Minister Shinzo Abe's.
The euro was down 1 percent on the day at 118.16 yen, though off a session low of 117.31. The euro was hurt against the yen by a German newspaper report saying Germany's regulator had ordered large banks to simulate a break-up.
A report showing U.S. home resales unexpectedly fell in December added to volatility and pressure on the euro and dollar, though the data was not seen as enough to derail the boost housing will likely provide to the economy this year.
Against the dollar, the euro was little changed at $1.3317.
While the euro has struggled to break above the $1.34 level since it hit a near 10-month high a week ago, strategists said it was likely to remain firm as concerns around the euro zone crisis ease.
The German ZEW figures beat all expectations, a sign that the euro zone crisis was no longer hitting Europe's largest economy as hard as it was last year.
"The euro can cross the $1.34 mark to reach $1.35 as early as the end of this week if data out of Germany continues to be strong," said Joerg Angele, FX strategist at Raiffeisen Bank International in London.
But Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, cautioned that failing to breach $1.34 may mean a near term-top is in place for the euro.
(Reporting by Wanfeng Zhou and Nick Olivari; Editing by Kenneth Barry and Dan Grebler)
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