By Kevin Buckland

TOKYO, April 21 (Reuters) - The dollar edged up on Thursday, supported by expectations for aggressive Federal Reserve monetary tightening, but it was well off the previous day's peaks amid nervousness about what G7 might say about its rapid appreciation.

The greenback firmed 0.34% to 128.305 yen, after soaring to a two-decade high of 129.430 on Wednesday as the Bank of Japan (BOJ) stepped in to the bond market for the third time in three months to defend its zero-percent yield target, drawing a stark contrast with the Fed's increasingly hawkish posture.

Finance Minister Shunichi Suzuki said on Thursday in Washington D.C. that he had explained the yen's "somewhat rapid" declines to his Group of Seven counterparts, but did not comment on how they reacted.

He has warned in recent days about the potential damage to the Japanese economy from a weakening currency.

Suzuki is due to meet U.S. Treasury Secretary Janet Yellen this week, prompting traders to pare back bearish yen bets on the potential for a step-up in rhetoric.

The dollar index - which measures the currency against six peers including the yen - ticked up 0.16% to 100.50, following its retreat in the previous session from a more than two-year peak of 101.03.

Also allowing the dollar to ease overnight, benchmark Treasury yields pulled back from the highest level since December 2018 at close to 3%, as dip buyers emerged. Those yields, though, also inched higher in Tokyo trading on Thursday.

"Few central banks will match the Fed this year for policy hikes and balance sheet retrenchment, making for a dramatic policy differential in the USD's favour," Westpac strategists wrote in a client note.

The dollar index "should remain bid in this environment, with talk of 101-102 likely to increase near term," they said.

San Francisco Fed President Mary Daly said on Wednesday she believed the case for a half-percentage-point rate hike next month is "complete" and "solid", adding to recent comments from other Fed officials backing bigger rate increases.

Markets are currently priced for half-point increases in both May and June.

By contrast, the BOJ on Wednesday offered to buy unlimited amounts of 10-year Japanese government bonds for four consecutive sessions as yields bumped against the 0.25% maximum leeway around its zero-percent target, showing its commitment to ultra-easing stimulus settings ahead of its policy meeting next week.

BOJ Governor Haruhiko Kuroda has stuck to the view that a weak yen is overall good for the economy, but reiterated on Thursday that currency volatility could hurt business activity.