FOREX-Yen hit by scale of reported fiscal plan, new bond talk
* Yen sags as Abe comments hint at larger fiscal stimulus
* Focus still on whether BOJ will help finance spending
* Officials deny plan to issue long-term debt
* Dollar inches higher before Fed meeting (Adds Jiji report on stimulus, adds analyst comment)
By Patrick Graham
LONDON, July 27 (Reuters) - Reports of a larger than previously expected fiscal stimulus plan for Japan had the yen back on the defensive on Wednesday, as investors bet the Bank of Japan (BOJ) would match that with a new bout of money-printing aimed at weakening its currency.
The yen has been buffeted by speculation, repeatedly denied by officials, that the BOJ will take the next step in eight years of emergency policymaking globally by handing money directly to the government with no strings attached.
The latest volley in that debate was a report by the Wall Street Journal, again denied by the Ministry of Finance, that Japan was considering issuing 40- and 50-year bonds. If the central bank was to buy and hold such debt, it would be another step towards outright financing of spending.
Allied to Prime Minister Shinzo Abe's promise on Wednesday to compile a stimulus package of more than $265 billion to reflate the flagging economy, that was enough to send the yen 1 percent lower.
"We have had a lot of volatility driven by the different reports this morning," said Thu Lan Nguyen, a currency strategist with Commerzbank (Xetra: CBK100 - news) in Frankfurt.
"The moves show that the bigger issue for the market is how this programme is going to be financed. So far it looks like the Bank of Japan is not ready to do something new and that leaves the potential for more downside for the dollar before the meeting on Friday."
After falling more than 1 percent in Asian trading, the Ministry of Finance's denial on the bond issue helped the yen recover some ground in early trade in London. By 0748 GMT, it was down 0.8 percent at 105.465 per dollar.
The day's big set piece is the U.S (Other OTC: UBGXF - news) . Federal Reserve's statement on policy, due after European markets close and widely expected to sound a more positive note on the economy that may bolster expectations for a rise in U.S. interest rates this year.
In that light, the dollar has quietly assembled five weeks of gains against the basket of currencies that defines its broader strength, since currency markets were shocked by Britain's vote to leave the European Union in late June.
It rose 0.1 percent on Wednesday to stand within sight of a four-month high hit at the end of last week.
"Some acknowledgement of the improved economic backdrop is likely in the statement and the market will go on slowly raising the odds of a 2016 rate hike," Societe Generale (Swiss: 519928.SW - news) strategist Kit Juckes said in a morning note.
"The dollar will go on getting support as the whole treasury curve edges higher (and) the euro is getting stuck below $1.10."
The euro inched up to $1.0997 in early trade in London. ($1 = 105.4700 yen) (Additional reporting by Hideyuki Sano and Shinichi Saoshiro in Tokyo; Editing by Jacqueline Wong and David Holmes)
