* HSBC flash PMI shows improvement in Chinese factory activity
* Australian dollar edges higher, yen slips
* Yen off 3-1/2-month highs versus both dollar and euro
* Minutes of Fed meeting lift U.S. stocks, help improve risk demand (Updates levels, adds comments)
By Masayuki Kitano
SINGAPORE, May 22 The yen eased versus the dollar on Thursday and edged away from a 3-1/2-month high, as a survey showing an improvement in Chinese factory activity helped bolster risk appetite and dampened demand for the safe haven currency.
The dollar rose 0.3 percent to 101.63 yen, well off a 3-1/2-month low near 100.80 yen plumbed on Wednesday. The euro edged up 0.2 percent to 138.95 yen, up from a 3-1/2- month trough of 138.15 yen also set on Wednesday.
The yen eased and the Australian dollar pushed higher after a preliminary HSBC survey showed that China's factory sector turned in its best performance in five months in May, although overall manufacturing growth still contracted slightly.
The dollar was managing to hold its ground against the yen, helped partly by a rise in U.S. Treasury yields from their recent lows, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
"The dollar has averted a drop to levels below 100 yen for now," Okagawa said, adding that the greenback's top side still looked heavy, however.
The U.S. 10-year Treasury yield last stood at 2.557 percent , having pulled up from a trough of 2.473 percent set last week, which was the lowest since late October.
The yen has risen in recent weeks, partly because speculation about the possibility of any imminent ramp up in the Bank of Japan's monetary stimulus has receded, while falls in U.S. Treasury yields have helped to weigh on the dollar.
One focal point for the yen is whether Japanese investors will step up their investment in higher-yielding overseas assets at a time when domestic bond yields have been held low by the BOJ's massive monetary stimulus.
In a sign of such yield-seeking behaviour by Japanese investors, Japan Post Insurance is ramping up its investment in Japanese stocks and foreign bonds, according to disclosures and a person with knowledge of the investment strategy.
The move shows that the government-controlled insurer - Japan's largest - is betting on the success of Prime Minister Shinzo Abe's policies in pursuit of higher returns.
Elsewhere, the euro eased 0.1 percent to about $1.3673 , having pulled up from Wednesday's low near $1.3635, its lowest level in more than three months.
The Australian dollar rose 0.2 percent to $0.9271, pulling away from an intraday low of $0.9220.
Minutes of the Federal Reserve's late April meeting released on Wednesday had reassured investors that Fed policymakers will continue to support the economy, helping lend support to risk appetite.
The minutes showed policymakers discussed exit strategies from ultra-loose monetary policy. But they also made clear that the Fed was not signalling that it was ready to "normalize" policy or raise interest rates any time soon.
"With the Fed not concerned about the inflation outlook, and the first rate rise not expected until mid-late 2015, the USD lost ground after the minutes, while U.S. stocks gained," said Spiros Papadopoulos, senior economist at NAB in Melbourne. (Additional reporting by Ian Chua in Sydney, Editing by Shri Navaratnam and Jacqueline Wong)
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