The dollar edged up against the yen on Thursday with investors reluctant to chase the yen higher as they waited to see if the Bank of Japan or the government will take new steps to rein in the yen's rise.

Earlier, rumours had circulated in the market that the BOJ would hold an emergency policy meeting at 2 p.m. (0500 GMT). That followed a media report that the central bank had started considering additional monetary easing steps.

The dollar briefly pared its gains against the yen after sources familiar with the matter said the Bank of Japan is highly unlikely to hold an emergency meeting on Thursday.

But the dollar remained firm against the yen due to short-covering, traders said.

Investors are watching to see if the Japanese central bank or the government will take new steps to rein in the yen's export-sapping rise ahead of a meeting between Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa expected next Monday.

The Sankei newspaper said on Thursday that the BOJ has started considering additional monetary easing steps in line with government efforts to support the country's economy.

The most likely option under consideration is expanding the BOJ's fund-supply tool put in place in December, the Sankei said without citing sources.

The central bank may either expand the fund supply volume to 30 trillion yen ($352 billion) from 20 trillion yen, or extend the duration of cheap, fixed-rate loans to banks to six months from three months, the paper said.

Such steps by the BOJ may help to spur dollar short-covering against the yen. But it would be difficult to change the yen's firm trend, said Tomohiro Nishida, treasury department manager at Chuo Mitsui Trust and Banking.

The dollar rose 0.3 percent to 85.74 yen JPY=, pulling away from a 15-year low of 84.72 yen hit on trading platform EBS last week.

If the BOJ announces only what the report is saying it's likely to disappoint the market. And there's a possibility the yen may even appreciate further, said Yuji Saito, director at Credit Agricole's foreign exchange department.

WATCHING THE CENTRAL BANK

Japanese Finance Minister Yoshihiko Noda repeated on Thursday that he is continuing to watch foreign exchange moves carefully.

Japanese authorities are seen unlikely to conduct yen-selling intervention, however, unless the yen's rise accelerates sharply, market players say.

The euro slipped after a report on the website of German newspaper Der Spiegel that austerity steps to fix Greece's debt trouble are damaging its economy, but falls in the euro were seen limited as the report provided few fresh incentives.

The euro fell 0.4 percent to $1.2805 EUR= and support for it is seen at the 100-day moving average of $1.2776, while rises could be capped around $1.2900, said a trader at a Japanese bank.

The euro dipped 0.1 percent against the yen to 109.78 yen EURJPY=R after touching a seven-week low of 109.07 yen on EBS earlier this week.

Japanese investors bought a net 2.18 trillion yen ($25.6 billion) of foreign debt in the week of Aug. 8-14, the largest volume of purchases since the finance ministry started to gather its weekly capital flows data in January 2005. [JP/CAP]

A source familiar with the data said Japanese banks have been aggressively buying overseas debt, boosting the net buying figure. But banks' hefty purchases of foreign bonds are not seen helping to rein in recent gains in the yen because banks hedge against foreign exchange volatility when they buy bonds abroad or raise funds overseas to finance their purchases, the source said.

Banks' buying of U.S. government debt is likely to have contributed to a fall in Treasury yields and to have been more of a negative factor for dollar/yen, some analysts say.

The pair's moves have recently had a strong correlation with U.S.-Japanese government bond yield spreads, which have narrowed as U.S. treasury yields fell sharply over the past few months. (Additional reporting by Masayuki Kitano and Rika Otsuka; Editing by Michael Watson)

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