* Yen up from lows as BOJ steps fall short of expectations
* BOJ introduces fixed-rate operation, no mention of JGBs
* BOJ governor due to speak later
* RBA raise rates to 3.75 pct from 3.50 pct, Aussie slips
By Satomi Noguchi
TOKYO, Dec 1 (Reuters) - The yen recovered from the steepest of its losses after the Bank of Japan fell short of expectations for more aggressive easing measures to support the economy on Tuesday, prompting investors to resume yen buying.
The Bank of Japan said it would introduce a new operation to provide funds for three months at a fixed interest rate of 0.1 percent, in a bid to enhance monetary easing by trying to bring down longer-term rates.[
But the action was less than the market had expected, with speculation ahead of the announcement that it could take bolder steps such as expanding its purchases of government bonds (JGBs) to depress yields and help ease deflationary pressure on the economy.
Bank of Japan Governor Masaaki Shirakawa is due to hold an embargoed news conference from 5 p.m. (0800 GMT), delayed from 0730 GMT, and the market will want to hear what he has to say.
"I think it's a bit disappointing for the markets especially when they could have done much more ... such as increasing quantitative easing, raising JGB buybacks," said Mitul Kotecha, global head of FX strategy at Calyon in Hong Kong.
"The market was looking for more, and that is one reason why dollar/yen has dropped so sharply after the move."
The dollar fell to around 87.00 yen from about 87.50 before the announcement. It hit a 14-year low of 84.82 yen last week. See and for announcement.
Euroyen futures jumped and the yen fell after the BOJ shocked markets by saying it would hold an emergency meeting to discuss economic and financial developments, coming soon after Japan's finance minister said he was open to a return to quantitative easing.
News of the meeting lifted the dollar, the Australian dollar and the euro about 1 percent on the day against the Japanese currency in a bout of short-covering.
A return to the BOJ's narrow form of quantitative easing, in which it flooded the financial system with cash, has so far seemed unlikely because insiders at the BOJ do not think the policy adopted between 2001 and 2006 was very effective.
"How effective this will be is yet to be seen. The BOJ seems to be yielding to political pressure to 'do something about deflation'," said Jonathan Allum, Japan strategist at KBC Financial Products.
"Contrary to much hype (the) yen is not that strong ... it is (the dollar) that is particularly weak, and that is driven by factors outside the control of the BOJ."
Dollar interbank borrowing costs have fallen below yen ones this year, adding to downward pressure on the dollar, which spiralled to the 14-year low on the yen last week and sparked concern in Japan about the deflationary impact of yen strength.
The euro was still up 0.8 percent at 130.76 yen and the Australian dollar was up 0.6 percent at 79.56 yen.
In contrast, the Reserve Bank of Australia raised interest rates as expected on Tuesday, prompting some selling of the Aussie against the dollar to book profits.
Australia's central bank lifted its key cash rates by 25 basis points to 3.75 percent, saying three hikes in a row was a material adjustment that would help sustain economic growth.
"The Aussie fell quickly after the RBA rate decision because the outcome was in line with what had been expected and prompted investors to take profits," said a senior trader at a Japanese brokerage firm.
The Australian dollar slipped 0.2 percent to $0.9148 after choppy trade on the RBA's rate hike.
The euro edged up 0.2 percent to $1.5030 and the dollar index, a measure of its strength against six major currencies, slipped 0.1 percent to 74.770. (Additional reporting by Kaori Kaneko and Charlotte Cooper; Editing by Michael Watson) ((Email: charlotte.cooper@thomsonreuters.com; +81 3 6441 1870; Reuters Messaging: charlotte.cooper.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))