* China stocks fall, prompting investors to cut yen shorts
* Focus on what Fed will say about Treasuries buying scheme
* Talk of dlr/yen selling related to Treasury coupon payments
By Satomi Noguchi
TOKYO, Aug 12 (Reuters) - The yen rose against the dollar on Wednesday as Chinese shares tumbled and prompted investors to further liquidate yen short positions ahead of a policy statement from the U.S. Federal Reserve later in the day.
The Shanghai Composite Index fell 3 percent on the day due partly to waning investor confidence in the market after a heated rally of more than 90 percent since the start of the year peaked at a 14-month high last week.
Falling Chinese stocks dented demand for riskier currencies and prompted investors to cut long positions in higher-yielding currencies such as the Australian dollar.
Uncertainty about the overall market reaction to the Fed's policy decision later on Wednesday also made investors cautious about keeping big positions, traders said.
"The currency reaction after the Fed is hard to predict. But one thing that is certain is that long positions that had been stretched are now looking vulnerable to liquidation," said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank.
The dollar fell 0.5 percent to 95.55 yen compared with late U.S. trading on Tuesday.
There was some talk of dollar-selling by Japanese investors repatriating funds related to $27 billion in coupon payments on U.S. Treasuries due on Aug. 15. In addition, $61 billion in coupon securities will mature on the same day.
Traders also said the dollar's jump to an eight-week high near 98 yen late last week following better-than-expected U.S. employment data was overdone, and investors were now cutting dollar long positions versus the yen.
"The recovery story has been pushed hard, very hard, and it makes sense to see this momentum unwind a little," said Adam Carr, senior economist at ICAP, Sydney.
"Particularly when there are plenty of equity analysts running around arguing strong moves to date don't reflect fundamentals."
The euro fell 0.5 percent to 135.19 yen and the Australian dollar dropped about 1 percent to 78.74 yen.
The Australian dollar fell 0.7 percent to $0.8245, while the euro was steady at $1.4151.
FED AWAITED
The Fed will conclude its two-day policy meeting and release a statement around 1815 GMT, with investors looking to its assessment of the economy and whether it unwinds some of the unconventional easing measures currently in place.
There is mounting speculation it might grow more optimistic about a recovery after the better-than-expected jobs report for July. There is talk it may start putting in place strategies to withdraw some of its extraordinary stimulus with investors looking for the first interest rate hike in March.
Any downside surprise, like from the Bank of England last week, could negatively affect the greenback.
But if the Fed states clearly that it will not expand or extend its $300 billion Treasury buying programme, due to expire in September, the dollar seems likely to rise against the euro and sterling, said Yuichi Hojo, director of FX distribution at UBS AG's Tokyo branch.
"If the supply of ample money is tightened, that would lead to a higher currency. It could lead to an outlook for interest rates to be raised," Hojo said.
"Since there has been quite a build up in dollar-selling and euro-buying, sterling-buying positions, there could be some correction of that," he said.
A trader for a European bank, however, said he was sceptical the Fed would state that it will end its buying of Treasuries, adding that he thought the Fed would continue such buying in some form.
"That would put a strong focus on the exit strategy," the trader said, adding that such a decision could send market interest rates soaring and be negative for equities. (Additional reporting by Masayuki Kitano in TOKYO and Anirban Nag in SYDNEY; Editing by Chris Gallagher)