(Corrects Japanese govt bond yield low and date in 7th paragraph)
* Investors await Bernanke testimony, BOJ meeting outcome
* Rising yields reflect inflation expectations- UBS
By Sophie Knight and Lisa Twaronite
TOKYO, May 22 The dollar hovered some way below last week's 4-1/2-year high against the Japanese currency, after being dampened by hints from two U.S. Federal Reserve regional presidents that the central bank will continue its bond-buying scheme.
But moves were muted, with the dollar adding just 0.1 percent to 102.57, off Friday's high of 103.32, as investors lacked conviction ahead of the Bank of Japan's post-policy meeting announcement and testimony from Fed Chairman Ben Bernanke at 1400 GMT.
Investors shrugged off data showing Japan's trade deficit was a sizable 879 billion yen ($8.6 billion) in April, with a pick-up in exports narrower than expected, despite the yen's 20 percent tumble against the dollar in the past six months.
Koji Fukaya, CEO of FPG Securities, said the market would remain subdued until the outcome of the BOJ meeting, although there was little likelihood of any surprises.
"The BOJ are simply going to continue with what they've already got. They are not expected to tack on anything extra," Fukaya said.
"But at the moment it is difficult for them to control the market, whether through the volume of their purchases or trying to influence investor sentiment."
Some market participants have speculated that the BOJ might frontload its bond purchases to soothe recent jitters in the bond market. The benchmark yield on 10-year JGBs first dropped to a record low of 0.315 percent on April 5, a day after the BOJ unveiled its massive easing, to 0.920 percent a week ago, its highest level since April 2012. It stood at 0.875 percent on Wednesday.
UBS economist Daiju Aoki and analyst Toru Ibayashi said they expected the BOJ to provide hints of its intentions in its statement later in the session.
"In our view, the increase in the long-term yield only reflects the market's healthy inflation expectations, particularly after the USDJPY hit the critical 100 level, and thus will not harm the ongoing recovery of the Japanese economy," they wrote in a note.
"Real yield... has continued to fall even after the exchange rate hit 100, and this bodes well for corporate investment. In our view, the 10-year nominal yield will remain relatively high for the next couple of months despite the BoJ's aggressive purchases given the market's healthy inflation expectations."
Yen bears are hoping that one or both of two things will coax Japanese investors to buy foreign assets: that the BOJ purchases will push down JGB yields, or the Fed's exit from its easing programme will spike Treasury yields.
"Given words from other Fed members ahead of Bernanke's testimony, we're not expecting Bernanke to signal taking a step back from bond-buying anytime soon, so that could be a short-term negative for the dollar," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.
"I would expect him to be upbeat about the economic assessment but cautious about headwinds, which is what he's been previously," he added.
On Tuesday, St. Louis Fed President James Bullard told an event in Frankfurt the Fed should maintain its policy, adjusting the pace of its bond buying according to incoming data, and said U.S. inflation has recently been below target.
Meanwhile, New York Fed President William Dudley said the economy's ability to tolerate less government spending and higher taxes in coming months will be key as to whether the Fed opts to reduce its bond purchases.
Against a basket of currencies, the dollar lost 0.1 percent to 83.766, while the euro added 0.1 percent to $1.2925.
The Australian dollar slacked 0.1 percent to $0.9796 after earlier climbing as high as $0.9842, pulling away from an 11-month low of $0.9711 plumbed earlier this week.
The Aussie has lost more than 5 percent so far this month, pressured by fears of a Chinese slowdown and lower commodity prices as well as recent signs of a U.S. economic recovery. ($1 = 102.5450 Japanese yen) (Editing by Eric Meijer and Sanjeev Miglani)