Japan's Nikkei advances, bond futures slip after BOJ holds rates steady

(Updates prices following BOJ policy decision)

By Kevin Buckland

TOKYO, Jan 23 (Reuters) - Japan's Nikkei stock average extended its advance and government bond futures turned lower on Friday after the Bank of Japan left interest rates unchanged, as had been widely expected.

The yen remained weaker against the U.S. dollar, even as the central bank raised its economic and ?inflation forecasts, and reiterated a pledge to continue tightening policy.

"The central bank doesn't seem that much more hawkish despite the upward revisions to ?growth and inflation," said Kyle Rodda, an analyst at Capital.com.

"It means policy could be loose ?for a while," he said. "That's good for the Nikkei, negative for ?the yen."

The Nikkei was ?0.4% higher at 53,903.46, as of 0340 GMT, 10 minutes into the afternoon session. It had ended morning trading up 0.3%. The ?BOJ decision came during the lunch break.

However, the ?broader Topix index pared its earlier advance to trade 0.5% up at 3,634.81.

Trading was choppy in the yen immediately after the central bank's announcement, but it was ?last down 0.1% at 158.555 per U.S. dollar, ?continuing its gentle ?drift lower seen over the past four sessions.

Benchmark 10-year Japanese government bond (JGB) futures flipped from a small gain to fall 0.11 yen to 131.49 yen. Cash bonds had yet to ?trade in the afternoon.

Longer-term JGB yields are in focus after expectations of additional fiscal stimulus pushed them to record highs earlier this week. Yields rise when bond prices fall.

In morning trading, yields across tenors were flat to lower.

The BOJ was widely expected to leave policy steady on Friday after hiking rates to a three-decade high of 0.75% last month.

Attention now turns to BOJ ?Governor Kazuo ?Ueda's news conference at 0630 GMT for any additional clues on the pace of rate hikes.

The outlook is complicated by historic weakness in the yen, even as JGB yields have ?vaulted to all-time highs as investors fretted about potential fiscal largesse from Prime Minister Sanae Takaichi, who has called a snap election for February 8 and pledged to suspend the 8% sales tax on food.

"While the messaging will be quite delicate, we expect the governor to strike as cautious a tone as possible on FX, and to indicate that the BOJ stands ready - if necessary - to coordinate with the government regarding bond market developments," said ?Hirofumi Suzuki, chief foreign-exchange strategist at SMBC.

The BOJ "is now in a phase of taking time to assess the effects" of last month's rate hike on the economy, he said.

Swaps markets currently anticipate two quarter-point hikes this year, with the first fully ?priced in by July, according to LSEG calculations.

(Reporting by Kevin Buckland; Editing by Sherry Jacob-Phillips and Subhranshu Sahu)