* Yen sags as Abe hints 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 sterling move)
By Patrick Graham
LONDON, July 27 (Reuters) - Signs 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.
Yen volatility JPYSWO= has neared record highs in the past month on speculation, repeatedly denied by officials, that the BOJ will take the next step in eight years of emergency policymaking by handing money directly to the government with no strings attached.
The latest volley was a report by the Wall Street Journal, again denied by the Ministry of Finance, that Japan was considering issuing 40-year 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. to Prime Minister Shinzo Abe's promise of 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," Commerzbank (DE:CBKG) currency strategist Thu Lan Nguyen said.
"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 morning trade in London. By 1050 GMT, it was down 0.8 percent at 105.51 per dollar. JPY=
The day's big set piece is the U.S. 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 light of that, the dollar has assembled five weeks of gains against the basket of currencies that defines its broader strength .DXY .
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 (PA:SOGN) 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 EUR= inched up to $1.0996.
After a very brief blip higher, sterling was 1/3 to 1/2 a percent lower against the dollar GBP= and euro EURGBP= . Dealers say there is still consistent selling interest whenever the pound gains.
Some said the appointment of French former EU internal markets Commissioner Michel Barnier as chief Brexit negotiator bodes ill for the interests of efforts to shore up London's position as Europe's main financial centre in the talks. ($1 = 105.4700 yen)