Weak yen? Think again

Yuriko Nakao | Bloomberg | Getty Images

Yen strength following a clear election win for Japan's ruling coalition in weekend elections has defied expectations of further currency weakness and has left the yen once again drifting away from the key 100-mark versus the dollar.

The Japanese currency on Tuesday firmed to about 99.13 per dollar, its strongest level in almost a week and up more than 2 percent from a one-and-a-half month low hit earlier this month.

Analysts say the yen's reaction to Sunday's upper house election is partly explained by the currency already weakening last week in anticipation of Prime Minister Shinzo Abe's ruling coalition securing a decisive win that strengthens Abe's position to push through economic reform.

(Read More: Is it 'all systems go' after Abe's big election win?)

The other reason, they add, is that with the election over there is an element of uncertainty about how aggressive Abe will be with his economic program and that means traders are holding back from pushing the yen lower for now.

"We saw this 'buy the rumor, sell the fact' trade yesterday with the yen, but there is also a question of uncertainty," said Harmen Overdijk, the head of portfolio management for Asia at EFG International, a private banking group.

"Monetary stimulus has been effective in pushing down the yen. The next step is, will Abe really deliver and will he deliver structural reforms?," he said.

(Read More: Here's what could make or break Abe's reform plan)

The yen has tumbled more than 15 percent against the dollar this year, underperforming its major currency counterparts, amid aggressive monetary stimulus from the Bank of Japan.

Currency weakness, which provides a powerful boost to exporters, is seen as a key part of Abe's efforts to revive Japan's economic fortunes and end years of deflation.

Strategists say the yen's downward trend remains intact and the currency should weaken towards 105 to 110 against the dollar in the months ahead, even though the 100-barrier appears elusive for now.

"It [yen strength] does have something to do with the benign environment. The Fed isn't moving yet and there's also been talk after this election about how aggressively Abe will pursue fiscal and monetary policies," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, referring to an easing of expectations for the Federal Reserve to unwind its monetary stimulus soon that has slowed a broad-based rally in the dollar.

"The base case scenario is still that he [Abe] will pursue those economic policies. Over time, the markets will absorb that message and as people become convinced that the focus remains on the economy, dollar/yen will push higher again so we remain yen bears," he added.

A concern is that although Abe looks likely to have a long tenure as prime minister following Sunday's election win, there is now less pressure to deliver long-term economic reforms.

Kocihi Hamada, a professor at Yale University and a special economic adviser to Abe's cabinet, told CNBC Asia's "The Call" that reviving the economy remained Abe's top priority.

(Read More: Will it be third time's a charm for dollar-yen?)

"Economic revival is the third arrow of his [Abe's] economic agenda and he has at least three years to concentrate on growth. He will focus on these matters," Hamada said.

And with the yen a central part of Abe's plan to revive Japan's economy, further strength in the currency could serve as timely reminder why not to let the reform mantle slip, analysts said.

"The tough part is to judge whether we will see serious yen weakness in the next six months," said David Mann, head of regional research for Asia at Standard Chartered Bank.

— By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC