JGBs pare declines as market pushes out BOJ rate hike bets

By Junko Fujita

TOKYO, July 31 (Reuters) - Japan's shorter-dated bonds pared declines on Thursday after the Bank of Japan policy statement caused market participants to push out expectations for any future interest rate hike.

The BOJ kept short-term interest rates steady at 0.5%, but revised up its inflation forecasts, a sign that the central bank will keep raising rates.

The two-year JGB yield rose to as high as 0.835% to hit the session high after the BOJ's decision, and was last at 0.825%, up 0.5 basis points.

The 10-year bond yield was flat at 1.555%, after rising to 1.565%. Yields move inversely to bond prices.

"The BOJ's economic outlook had both hawkish and dovish elements," said Takafumi Yamawaki, head of Japan rates research at J.P. Morgan Securities.

"And we have so many uncertainties in the next three months that could determine the fate for the BOJ's rate path, including the global economy and domestic politics," he said.

Doubts crept in about the resilience of global trade, with the United States continuing to use the threat of tariffs to strong-arm partners into deals.

Talks between the United States and China resulted in no major breakthroughs or a decision on whether to extend a trade truce that expires on August 12.

Swap rates indicate a 54% chance for the BOJ to raise rates by 25 bps to 0.75% at its October policy meeting and 71% in December.

The current level of yields factored into these expectations, strategists said.

"The 10-year yield would not hit 1.7% unless the economy grows much faster than expected," said Tomoaki Shishido, senior rates strategist at Nomura Securities.

Politics may come into play. Japan's Prime Minister Shigeru Ishiba vowed to remain in his post after his ruling coalition suffered a bruising defeat in upper house elections, prompting some in his own party to doubt his leadership.

If Ishiba resigns, that could trigger a leadership race in his Liberal Democratic Party (LDP), and market players say the BOJ is unlikely to raise interest rates until the new administration is formed. (Reporting by Junko Fujita; Editing by Lincoln Feast.)