* Yen jumps on prospect Japanese pension funds will invest

more domestically

* Markets largely unfazed by renewed Middle East tensions

for now

* U.S. dollar falls; New Zealand dollar gets rates boost

(Updates to Asia afternoon)

By Rae Wee

SINGAPORE, July 10 (Reuters) - The yen bounced on Friday on

news that Japan plans to encourage pension funds to increase

their holdings of domestic financial assets, a move analysts

said could offer greater support to the battered currency than

intervention.

Japanese Finance Minister Satsuki Katayama said the

government is pursuing measures that would include the

Government Pension Investment Fund (GPIF), one of the largest

pension funds in the world, to make "substantially greater

investments in Japanese financial assets."

The yen jumped from the weaker side of 162 per dollar

to an intraday peak of 161.285. It was last 0.46% stronger at

161.64 per dollar.

"The pension funds are pretty large in size, so you can

imagine if a structural tilt to how they are allocating assets -

currently, 50% is allocated to foreign investments in their

strategic allocation, and a shift in that would definitely

create a lot more inflows for domestic assets ... so that's

supportive of the currency and at the same time, also supportive

of equities and bonds," said Fabien Yip, a market analyst at IG.

"With the currency situation that we're seeing, with yen at

close to 40-year lows against the dollar, and they are also kind

of running out of ideas on how to support the currency ... I

think trying to change the issue structurally or fundamentally,

which is to create more flows into yen-denominated assets, would

be supportive of the currency in the longer term."

The yen strength was broad-based. The euro fell

0.3%to 184.94 yen, while the British pound slid 0.28%

to 217.02 yen.

Before Friday's news, the yen had been languishing near

40-year lows, keeping traders on guard for potential

intervention by Japanese authorities.

The yen's rise in turn pushed the dollar lower, as it fell

0.15% against a basket of currencies to 100.75.

Investors for now seemed to brush off flaring tensions in

the U.S.-Israeli war on Iran, but the implosion of a ceasefire

between the U.S. and Iran has once again cast a cloud over the

outlook for energy prices and global inflation.

"The spectre of war still hangs over sentiment," said

Thierry Wizman, global FX and rates strategist at Macquarie

Group.

"The question confronting traders is whether Iran is willing

to return to large-scale kinetic war with the U.S. and its

allies if necessary to strengthen its claim of control over the

Strait of Hormuz."

The dollar was set to end the week little changed, with

renewed safe-haven gains offset by receding expectations of a

rate increase from the Federal Reserve.

The euro rose 0.12% to $1.1443. Sterling was

up 0.17% at $1.3431 and was set to rise roughly 0.6% for the

week.

The Australian dollar edged 0.19% higher to $0.6955,

while the New Zealand dollar advanced 0.35% to $0.5775.

The kiwi was headed for a weekly gain of more than 1%, after

the Reserve Bank of New Zealand (RBNZ) hiked rates this week and

signalled further tightening ahead.

Westpac expects the RBNZ to raise rates by 25 basis points

in September and December and forecasts the cash rate to peak at

4% in September 2027.

"The exact timing of the tightening profile is highly

uncertain and even the tightening we forecast at the September

2026 meeting should not be regarded as a done deal," said Kelly

Eckhold, Westpac's chief economist.