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FOREX-Yen falls on Japan pension fund comments, sterling jumps

* Dollar, euro buoyed by surge for Nikkei

* Japan finmin upbeat on economy, hints pension fund may act

* Euro ticks up against dollar

* UK labour report drives sterling higher

(Updates with fresh quotes, prices)

LONDON, April 16 (Reuters) - The yen fell against the dollar and the euro on Wednesday, hit by comments by Japan's finance minister that traders took as a sign of future buying of Tokyo stocks by its state pension fund.

The other big in European was sterling, driven higher by more upbeat labour market data that showed wages caught up with inflation for the first time since 2010.

The inverse relationship between the Nikkei share index and the yen is well established. Foreign players traditionally sell the yen to hedge the currency risk in buying Japanese shares while a stronger Nikkei typically makes Japanese investors more comfortable with investing abroad, also negative for the yen.

The index gained 3 percent on Wednesday on the back of Finance Minister Taro Aso's promise that "moves" by the $1.26-trillion government pension fund would become apparent from June.

That came amid rhetoric from Japanese officials read as cooling the prospect of more monetary easing in Prime Minister Shinzo Abe's push to drive up inflation and get Japan growing.

"Some of the recommendations for the pension fund are going to be implemented shortly and that story would explain the move overnight," said Ian Stannard, head of European currency strategy with Morgan Stanley in London.

"But overall the risk is that we do get another setback (for the dollar) in the short-term. They're playing down the need for more policy action and that's going to leave the market quite disappointed and the yen well supported."

The yen weakened to 102.25 per dollar and 141.48 per euro, down 0.3 and 0.5 percent respectively but off lows. The euro, still resilient to recent opposition of European Central Bank officials to further gains, rose 0.2 percent to $1.3689.

TREASURIES KEY

Some traders said the dollar's recovery from its worst performance in a month against the yen last week could prompt another effort to push the greenback higher.

The currency's failure to strengthen as the economic recovery deepens has surprised many investors this year, and the jury is still out on whether it will occur.

Any perception that the recovery is strengthening and making higher U.S. interest rates next year more likely, should show up in higher Treasury yields. Ten-year yields have risen 6 basis points in the past 24 hours.

"Like a lot of people I'm playing it from the long dollar side at the moment," said Graham Davidson, a spot currency dealer with NAB in London.

"We think the squeeze that we have seen (this month) in Treasuries is an overreaction and we are starting to build upwards again. There is a big correlation between that and the dollar."

Fed Chair Janet Yellen was due to speak on monetary policy and the economic recovery later on Wednesday.

Sterling, stuck in a rut since mid-February, gained as much as half a percent against the dollar after unemployment fell faster than expected to below the 7 percent level originally set by the Bank of England as a marker for rises in interest rates.

The bank has revised that guidance, but the numbers overall were read as a sign that Britain's recovery may not prove just one of rising house prices and renewed consumer borrowing.

The pound gained 0.3 percent to $1.6785 and 0.2 percent to 82.40 pence.

(Editing by Nigel Stephenson)