Japanese yen rallies, bond yields climb after BOJ hikes rates

(Updates prices after Japan equity market close)

By Kevin Buckland

TOKYO, Jan 24 (Reuters) -

The yen strengthened and Japanese government bond yields rose to fresh multi-year highs on Friday after the Bank of Japan hiked

interest rates as expected and raised its inflation forecasts, reinforcing views it will push rates up again.

Japan's Nikkei share average shed early gains to end the day down 0.07% at 39,931.98. It entered the midday recess up 0.6%, with the BOJ's announcement coming shortly before the start of afternoon trading.

The yen was about 0.5% stronger at 155.21 per dollar as of 0633 GMT, after initially swinging between small gains and losses immediately after the policy decision.

The two-year JGB yield rose as much as 3 basis points (bps) to 0.725% at its highest point, a level last seen in October 2008.

"Looks like overseas investors took the Outlook Report as hawkish," said Shoki Omori, chief global desk strategist at Mizuho Securities, referring to the BOJ's new forecasts.

"Rates trading (is) choppy. Yields are higher but trading volume isn't high."

The BOJ hiked short-term lending rates by a quarter point to 0.5%. The move had been already priced into money markets after central bank officials, including Governor Kazuo Ueda, had clearly signalled earlier this month that policy tightening was on the table.

In its quarterly outlook report, the board raised its forecast for core consumer inflation to hit 2.4% in fiscal 2025 before slowing to 2.0% in 2026. In the previous projection made in October, it expected inflation to hit 1.9% in both fiscal 2025 and 2026.

The market is currently priced for one further quarter-point increase by year-end.

"I expect the rate will be kept the same for at least the next six months," keeping the pace broadly the same with hikes so far this cycle, said Kota Suzuki, a strategist at Nomura Asset Management.

"The central bank will be a little more cautious from now on as it will carefully assess the economic situation and the impact of the interest rate hike."

Early gains in Japanese stocks came on the back of a 0.5% rise in the U.S. S&P 500 overnight to mark its first closing record since Dec. 6.

The yen was supported by comments from U.S. President Donald Trump that he thought he could reach a trade deal with China and avoid additional tariffs. (Reporting by Kevin Buckland; Editing by Alan Barona, Savio D'Souza and Kim Coghill)