Japanese bonds waver as traders ponder BOJ's next move

By Rocky Swift

TOKYO, Aug 1 (Reuters) - Japanese government bonds (JGBs) wavered on Friday as economic uncertainty clouded prospects for policy changes by the central bank.

The benchmark 10-year JGB yield was flat at 1.55% after earlier falling 1.5 basis points (bps). The yield was down 5 bps from last week's close. Yields fall when bond prices rise.

The Bank of Japan on Thursday kept its short-term interest rates steady at 0.5%, but revised up its inflation forecast, a sign that it would stay on its path of gradually raising rates.

JGBs fell immediately after the announcement, but then rallied later in the session after comments by BOJ Governor Kazuo Ueda were interpreted as more dovish than the policy statement. Ueda flagged continuing risks to the economic outlook in keeping interest rates steady.

"Governor Ueda was quite cautious, but I still expect the BOJ to hike its policy rate by October 30," said Koichi Fujishiro, chief economist at Dai-ichi Life Research Institute.

Demand for safety assets was also bolstered with the United States continuing to use the threat of tariffs to pressure trade partners into deals. Shortly before Asian markets opened, U.S. President Donald Trump slapped dozens of countries with steep tariffs.

The BOJ said in its quarterly report that uncertainty over the impact of U.S. trade policy "remains high" - a less pessimistic view than in May when it said uncertainty was "extremely high."

Japan's long-dated JGB yields remain near record peaks after the ruling coalition lost its majority in upper house elections last month. Opposition parties advocating debt-funded tax cuts have strengthened, adding pressure on fiscally conservative Prime Minister Shigeru Ishiba to step aside.

The 20-year yield rose 1 bp to 2.55%. The two-year yield fell 1 bp to 0.81%, while the five-year yield fell 1 bp to 1.080%.

(Reporting by Rocky Swift; Editing by Subhranshu Sahu)