JGB yields fall as inflation cools, PM Takaichi reiterates fiscal pledge

(Updates prices, adds analyst comment in 4th paragraph, details on PM Takaichi speech in 1st, 6th.)

By Rocky Swift

TOKYO, Feb 20 (Reuters) - Japanese government bonds rose on Friday after cooling inflation reduced the urgency for central ?bank rate hikes and Prime Minister Sanae ?Takaichi reiterated her pledge to pursue "responsible" fiscal policy.

The benchmark 10-year JGB yield fell 3.5 basis points (bps) to ?2.105%. The two-year bond yield , the one most sensitive to Bank ?of Japan policy rates, decreased 0.5 bp to 1.25%. ?The five-year yield slid ?2.5 bps to 1.605%. Yields move inversely to bond prices. Japan's annual core consumer inflation hit ?2% in January, the slowest in two ?years, data showed on Friday. That's in line with the BOJ's projection that said inflation will briefly slow below its 2% ?target.

A continued drop in food ?price growth ?could "provide an opportunity for the Bank of Japan to ease its hawkish stance on inflation," Noriatsu Tanji, chief bond strategist at Mizuho Securities, wrote ?in a note. Long-term JGB yields surged to record highs last ?month as concerns about Japan's fiscal health swelled after Takaichi, a fiscal dove, called a snap election and pledged to cut sales taxes on food for two years. But a measure of calm has returned to the market ?following ?her party's landslide victory, with yields falling and resilient demand ?seen at JGB auctions.

On Friday, Takaichi spelled out her policy objectives ?while pledging to avoid "reckless fiscal policies that undermine market confidence."

"It may be that Japan's one-party dominance system is attracting global attention amid political instability in major developed nations, thereby stimulating demand from investors who previously showed little interest in JGBs," Ataru Okumura, a senior strategist at SMBC Nikko Securities, said in a report.

The 20-year yield slid ?3 bps to 2.925%, set for a fourth-straight weekly decline. The 30-year yield dipped 1 bp to 2.925%, while the yield on the 40-year JGB, Japan's ?longest tenor, fell 2.5 bps to ?3.55%. (Reporting by Rocky Swift in Tokyo; Editing by ?Subhranshu Sahu and Harikrishnan Nair)