Yen edges up on Japan CPI data, shaky stock markets

TOKYO, May 25 (Reuters) The yen edged up on Friday, pulling away from a three-month low against the dollar, after data showed Japan's core consumer prices fell at a slower pace in April and kept the Bank of Japan on track to raise rates in coming months.

Traders said there were keeping an eye out for any yen strength on the session if investors close out risky positions such as carry trades, with regional equity markets tracking a 1 percent slide in Wall Street shares overnight.

''The figures were not surprising, so the yen buying was a delayed reaction to the fall in U.S. stocks on risk concerns,'' said a trader at a Japanese bank.

Market players have widely borrowed the low-yielding yen to fund purchases of higher-yielding currencies and assets in the carry trade, helping lift sterling to 15-year peaks against the yen and the euro to an all-time high this week .

The dollar dipped to 121.20 yen down from near 121.40 yen in late New York trade and sliding stop-loss orders were triggered around 121.25 yen. The U.S. currency hit a three-month peak of 121.88 yen earlier in the week.

The euro fell to 162.70 yen from near 163.00 yen late on Thursday.

The single currency also slipped to $1.3421 near a six-week low of $1.3415 hit the previous session. In early trade, the Nikkei share average fell 1.3 percent on the back of a 1.5 percent drop in the Nasdaq Composite index on Thursday.

Japan's core consumer price index matched forecasts with a 0.1 percent fall in April from a year earlier after declining by 0.3 percent in March, suggesting inflation is slowly returning back towards positive territory.

With Japan's steady expansion seen in good shape, expectations have mounted for the BOJ to lift rates to a 12-year high of 0.75 percent from the current 0.5 percent in August or September following parliamentary elections in July.

BOJ Governor Toshihiko Fukui has said the central bank could raise rates even if inflation is still in negative territory as long as the long-term outlook for prices to rise remains in place.

But the yen has suffered despite the prospects for a BOJ rate increase as Japan's very low yields compared with those in the United States and euro zone have spurred carry trades and prompted Japanese investors to seek better returns in foreign assets.

The dollar gained on Thursday on data showing U.S. new home sales rose at the fastest pace in 14 years, stirring more doubts about whether the Federal Reserve would need to cut rates later this year and undermine the dollar's yield advantage.

REUTERS SZ PM0632