FOREX-Yen rises sharply, Draghi's comments weigh on euro
* Yen gains broadly, but bounce could fizzle out
* Aso's comments, doubts over radical BoJ chief helps yen
* Euro down 1.5 percent vs yen, Draghi's comments weigh
LONDON, Feb 8 (Reuters) - The yen rose sharply on Friday after Japan's finance minister said the currency's recent drop had been overdone, as doubts crept in whether the Bank of Japan will get a governor who will ease policy aggressively.
The gains are likely to be temporary, though, as data showed the country's balance of payments had deteriorated. Japan posted a current account deficit in December, marking the first time the balance has turned red for two straight months in data dating back to 1985.
U.S. and Asian funds bought the yen, with the euro's losses more pronounced. Comments by European Central Bank chief Mario Draghi's that the exchange rate is important for growth and price stability weighed on the common currency.
Investors interpreted the remarks as setting the scene for a possible future interest rate cut by the ECB, in the event that the euro zone economy slows further.
The euro fell 1.5 percent against the yen to 123.54 yen with traders reporting selling by Asian funds. The dollar shed 1 percent to hit a session low of 92.17 yen as a U.S.-based investor sold the greenback.
The yen, which has fallen to a 34-month low against the euro and a 33-month low against the dollar, got a boost from Finance Minister Taro Aso's comments that the yen's slide from 78 to 90 per dollar was steeper than intended.
It was also helped by a Reuters report that Japanese Prime Minister Shinzo Abe faces opposition from within his own cabinet and financial bureaucrats to appoint a new BoJ governor who will pursue aggressive easing policies.
"The market is responding to these reports and taking profit in short yen positions," said Geoffrey Yu, currency strategist at UBS. "But the dollar remains a buy on dips against the yen. Speculation about who will take charge at the BoJ will continue until there is an appointment."
Earlier this month, BoJ governor Masaaki Shirakawa said he will step down on March 19, a few weeks ahead of schedule, allowing Prime Minister Abe to appoint a chief who is more amenable to making drastic policy changes to get Japan out of deflation.
Expectations that the BoJ will aggressively ease monetary policy in coming months and that the Abe administration will appoint a chief who will implement these policies have driven the yen lower in recent months.
The euro was steady against the dollar, at $1.3405, after having fallen 0.9 percent on Thursday, when it briefly dropped to $1.33705, the lowest since Jan. 25.
Draghi said economic activity in the euro area should recover gradually in 2013 but added there are more negative risks than positive.
The euro could however draw further support from the perception that the ECB is withdrawing some of its unconventional policy easing setting at a time when both the Federal Reserve and the BoJ are expanding their balance sheets.
Expanding balance sheets means printing more money and usually weighs on a currency as it increases its supply.
"When U.S. and Japanese central banks are expanding their balance sheet, the ECB is shrinking its balance sheet," Makoto Noji, senior strategist at SMBC Nikko Securities.
"And it's not like the ECB is ready to cut rates soon because the euro's rise is causing real risk of deflation. The euro is likely to be firm unless we have a major surprise in the Italian election," he said.
Polls have showed Italy's centre-left bloc on course to win the Feb. 24-25 election. But its narrowing lead over the centre-right led by former prime minister Silvio Berlusconi has unnerved investors on concerns that his policies, such as tax-cut proposals, could undo the country's efforts to get its finances back on track.