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 more support to the battered currency than intervention.

Japanese Finance Minister Satsuki ​Katayama said ​the government was pursuing measures that would include encouraging the Government Pension Investment Fund, 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 0.38% stronger at 161.75 per dollar.

"The pension funds are pretty large in size (and) currently, 50% is allocated to foreign investments in their strategic allocation, (so) a shift in ​that would definitely ‌create a lot more ⁠inflows for domestic ⁠assets," said Fabien Yip, a market analyst at IG.

"That's supportive of the currency and at the same ​time, also supportive of equities and bonds."

BROAD-BASED YEN RALLY

The rally was broad-based, ‌with the euro and British pound down around 0.3% and ⁠0.2% respectively against the 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 on Friday in turn pushed the dollar lower, as it fell a touch against a basket of currencies to 100.85. The world's most traded currency was set to end the week little changed. The euro was steady at $1.1430, while sterling was 0.16% higher at $1.3424.

WAR CLOUDS SENTIMENT

Investors for now seemed to brush off flaring tensions in the Middle East, 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."

(Reporting by Rae ⁠Wee; Additional reporting by Harry Robertson and ​Sophie Kiderlin; Editing by Thomas Derpinghaus, Kim Coghill, Helen Popper and Sharon Singleton)