Japan bonds set for weekly drop as PM Ishiba takes office

SYDNEY, Oct 4 (Reuters) - Ten-year Japanese government bonds were sold on Friday and the short-end was headed for its heaviest weekly selloff for nearly two months as traders reckoned Japan's new prime minister would not get in the way of the central bank raising interest rates.

Ten-year yields rose five basis points to 0.875%, tracking a rise in global yields as a stronger-than-expected U.S. services survey pushed out rate-cut expectations.

Yields rise when bond prices fall. Benchmark 10-year futures dropped 17 ticks.

The rest of the curve was mostly steady, leaving two-year yields up 4.3 bps for the week to 0.366%, and five-year yields up 5.4 bps this week to 0.491%.

Prime Minister Shigeru Ishiba, an erstwhile critic of the Bank of Japan's aggressive monetary policy easing, made an apparent dovish turn after meeting with BOJ Governor Kazuo Ueda this week, saying Japan is not ready for rate hikes.

That set the yen for its sharpest weekly drop in eight years, however, bond traders have looked through the surprising comments, said Nomura strategist Naka Matsuzawa, especially since Ishiba has called an election for Oct. 27.

"People know that it is more for the upcoming election and I think even he's not really saying to give up on the rate-hike processes," Matsuzawa said.

Ishiba is due to make a policy speech at 0500 GMT.

The 20-year yield was flat at 1.651% and the 30-year yield fell two bps to 2.076%.

(Reporting by Tom Westbrook; Editing by Sherry Jacob-Phillips)