Yen dips after tankan doesn't alter rate outlook

TOKYO, Dec 15 (Reuters) The yen edged down on Friday after the quarterly tankan survey showed improved business sentiment but failed to alter expectations that the Bank of Japan will keep interest rates on hold next week.

The tankan's headline index for large manufacturers improved to a two-year high of plus 25, up from plus 24 in the previous survey in September and matching the median forecast of economists in a Reuters survey.

''It was in line with expectations. I don't think the numbers were bad,'' said Kazuhiro Kaneko, a manager at Mizuho Trust & Banking's treasury department.

The tankan, which also showed that business sentiment among big non-manufacturers improved to the best level in 15 years, underscored market expectations for the central bank to raise rates in coming months.

Although the tankan readings were solid, the data didn't pack enough punch to alter expectations that the BOJ would hold off from raising rates at a two-day policy meeting that ends on Tuesday, traders and analysts said.

The yen initially had a subdued reaction to the tankan, before it was pushed lower, possibly due to yen-selling flows related to the launch of investment trusts, said Kaneko at Mizuho Trust.

By 0340 GMT, the dollar was up slightly on the day at 117.90 yen after hitting a three-week high of 118.13 yen earlier in the session.

The euro inched up to 155.05 yen from around 154.90 yen in late U.S. trading, in sight of a record high of 155.59 yen hit on Thursday on electronic trading platform EBS.

Against the dollar, the euro was little changed at $1.3150.

Sterling rose to an eight-year high of 231.48 yen before pulling back to 231.10 yen.

Some traders said the sterling was supported by speculation about the potential for flows after Japan Tobacco Inc. confirmed on Friday it was in talks to buy smaller rival Gallaher Group Plc, in a 7.5 billion pound ($14.7 billion) deal.

YEN ON DEFENSIVE Parts of the tankan such as the numbers for capital spending, and business sentiment for small firms were rather good, said Masafumi Yamamoto, currency strategist for Nikko Citigroup.

''The market's perception, however, is that there won't be a rate rise in December. There is a bearish sentiment toward the yen, particularly among overseas players,'' Yamamoto said.

That, coupled with receding pessimistic views toward the U.S. currency, likely helped the dollar advance against the yen, he said.

The dollar gained in the previous session as stronger-than-expected U.S. data strengthened the view that the Federal Reserve may not have to trim interest rates just yet to stimulate the economy.

The U.S. government said on Thursday that the number of people claiming initial unemployment benefits last week fell more sharply than economists had expected, supporting the view of a robust labour market evident in recent payrolls data.

Some soft Japanese indicators including a smaller-than-expected rise in machinery orders in October have raised doubts about the strength of the economy and prompted investors to scale back expectations for a BOJ rate rise to 0.50 percent by year-end.

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