* Yen edges up vs euro, commodity currencies
* Japan's Q1 GDP contracts 4.0% vs forecasts for -4.2%
TOKYO, May 20 (Reuters) - The yen edged higher on Wednesday, after falling the previous day following improved business sentiment in Germany which helped lift investor confidence and boosted interest in riskier assets.
Japan's gross domestic product contracted by 4.0 percent in the first quarter of this year, marking its biggest quarterly fall on record but broadly meeting forecasts for a 4.2 percent drop.
"This is of course a very bad number, but it was in line with expectations and is neutral in terms of market impact," said Toshihiko Matsuno, senior strategist, SMBC Friend Securities.
"I expect there to be a growing consensus in the market that this is the bottom for the economy and that we will start to see a recovery from here."
The yen inched up to 95.93 per dollar, a few ticks higher on the day but off a two-month high of 94.55 set earlier in the week.
It rose 0.3 percent against the euro to 130.50, after losing 0.4 percent the day before.
It had edged back in sight of this month's seven-month low against the Australian dollar which stands at 76.11, according to Reuters data.
But in early Asian trade the Aussie slipped 0.3 percent on the day to 73.96 yen, although the New Zealand dollar held steady at 57.58 yen.
Currencies such as the commodity-related currencies which are expected to benefit with an eventual recovery in the global economy, rose sharply on Tuesday as investor confidence improved.
The Chicago Board Options Exchange Volatility index, known as the "fear gauge", dropped to levels not seen since the collapse of Lehman Brothers, suggesting investors are much less worried about sharp swings in equity prices.
The euro slipped 0.1 percent to $1.3612 after climbing half a percent on Tuesday in the wake of a better-than-expected indicator out of Germany.
German investors and analysts grew much more optimistic in May that economic conditions would brighten later this year, with the monthly ZEW poll on economic sentiment rising to 31.1 from 13.0 in April.
In the United States, the Dow Jones average and the S&P 500 slipped, with financial shares down and housing data disappointing the market, but the Nasdaq gained as technology shares rose. (Reporting by Charlotte Cooper; Editing by Edwina Gibbs)