* Lack of Japan policy action on yen weighs on Nikkei
* Nikkei's next target at 8,697, 61.8% retracement
TOKYO, Aug 25 (Reuters) - Japan's Nikkei average briefly fell over 2 percent on Wednesday to a 16-month low as disappointment spread over the lack of Japanese policy action to rein in the strong yen, which threatens a fragile economic recovery.
Hopes for action by the government and the Bank of Japan had provided support after the Nikkei business daily reported that Japan's Ministry of Finance may consider unilateral yen-selling market intervention if speculators drive up the yen.
But these hopes gradually faded as the day wore on without signs of any new policy moves, while a raft of statements by Finance Minister Yoshihiko Noda had little impact.
Noda said he had not received any specific instructions from Prime Minister Naoto Kan on currency issues adding that he could not comment on the possibility of Japan intervening in forex markets.
"There have been a lot of reports hinting that something might happen with the BOJ, and a lot of statements, but the growing market feeling is 'just do it,'" said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
"The consensus feeling is that intervention might not have much of an impact, but investors keep on expecting something -- and all we have is talk."
The benchmark Nikkei fell 2 percent in mid-afternoon to a 16-month low but then pared losses slightly, shedding 1.7 percent or 157.18 points to 8,837.66.
The broader Topix shed 1.3 percent to 806.85.
The dollar recouped some ground to 84.30 on electronic trading platform EBS after hitting a 15-year low around 83.60 yen the day before.
In Tokyo trading, Honda Motor Co and other exporters slid.
Many Japanese exporters have set their currency rate assumptions around 90 yen per dollar for the financial year to next March, although Honda cut its assumption to 87 yen from 90 yen. A stronger yen eats into exporter profits when repatriated.
Honda lost 2.7 percent to 2,729 yen, TDK Corp shed 3 percent to 4,255 yen and stepper maker Nikon Corp fell 3 percent to 1,367 yen. (Reporting by Elaine Lies; Editing by Joseph Radford)