Japanese bond yields zoom, stocks slide as rate hike looms

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2yr, 5yr & 10yr JGB rise sharply to 17-year highs

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Yen rallies to 155.39 per dollar

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Nikkei falls 2%; banking index rises to 19-yr peak

(Updates prices, adds equity market reaction, analyst quotes, bullets and changes slug words for media clients to JAPAN-MARKETS/)

By Junko Fujita

TOKYO, Dec 1 (Reuters) - Japanese government bonds tumbled in the heaviest selling for four months on Monday while stocks slid and the yen rose on the prospect of higher interest rates as soon as this month.

Bank of Japan Governor Kazuo Ueda laid the groundwork for a December hike in a speech at Nagoya and surprised markets by mentioning, at a news conference, good discussions with Prime Minister Sanae Takaichi, who had previously resisted policy tightening.

Two-year yields, the most sensitive to the BOJ's policy rate, jumped 4.5 basis points and crossed 1% for the first time since 2008. Benchmark 10-year yields jumped seven bps to a 17-year high of 1.875%. In bond markets, yields rise when prices fall.

The yen hit its highest in a week-and-a-half at 155.395 per dollar and the Nikkei fell 2%, with most sectors besides financials logging losses.

"Stock market participants had some expectations that Prime Minister Takaichi might prevent the BOJ from raising rates early," said Hiroshi Namioka, chief strategist at T&D Asset Management

"But having seen Ueda's comments today about having good conversations with Takaichi, the prime minister probably supported the BOJ's rate hike."

Five-year yields rose 6.5 bps to 1.38%, also the highest since 2008, while 20-year yields hit their highest since 1999 at 2.89% and 30-year yields rose to a record high of 3.395%.

The moves were the sharpest since July and extend a selloff that has accelerated since Takaichi came to power and put forward a 21.3 trillion yen ($137 billion) stimulus package aimed at kickstarting economic growth.

HIKE ON THE TABLE

Speaking in Nagoya, home to Toyota Motor and other auto parts companies, Ueda signalled that the conditions for a hike were falling in to place and caught forex traders' attention by noting that a weak yen was likely to stoke inflation.

That both put a floor on the currency, which has been under heavy pressure in recent months, and knocked the stock market where exporters have been beneficiaries of a cheap currency.

Optic fibre cable maker Fujikura (FKURF), with a 9% drop, was among the top losers while a 4% slide for chip-testing equipment maker Advantest (ADTTF) dragged heaviest on the Nikkei.

Banks, which can benefit from higher rates and a steep yield curve, made modest gains with Mitsubishi UFJ touching a record high and the Topix banks index hitting its highest in almost two decades.

Rising bond yields narrowed the gap between U.S. and Japanese 10-year benchmarks to its smallest since April 2022 - a boost for the yen as well as an illustration of how weak it has been, with the yen at 120 per dollar in April 2022.

"Today's remarks by Governor Ueda suggest that the BOJ is increasingly concerned about the adverse effect of continued exchange rate depreciation on consumer spending," said Fred Neumann, chief Asia economist at HSBC.

"Even if the BOJ hikes in December, which appears more likely after Ueda's remarks today, investors will take a close look at subsequent policy guidance. A hawkish hike in December would go a long way to helping anchor exchange rate and bond market expectations."

($1 = 155.6400 yen) (Additional reporting by Ankur Banerjee in Singapore. Writing by Tom Westbrook; Editing by Sam Holmes)