Japan's five-year bond yield hits fresh high as Mideast conflict fuels inflation fears

TOKYO, March 27 (Reuters) - The yield on five-year Japanese government bonds climbed to a new record high on Friday, as the escalating U.S.-Israeli war on Iran fuelled inflation concerns and strengthened expectations of faster interest rate hikes by major central banks.

The five-year yield rose 3 basis points to 1.770%, while the benchmark 10-year JGB yield rose 3 bps to 2.300%. Yields move inversely to bond prices.

"The JGB markets are likely to remain at the mercy of external factors, including headlines about the Middle East situation and developments in crude oil and foreign exchange markets," said Kazuya Fujiwara, bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

The two-year yield, which is most sensitive to Bank of Japan policy rates and touched a nearly three-decade high on Thursday, advanced 1.5 bps to 1.35%.

Japan remains highly exposed to spikes in crude oil prices due to its heavy reliance on imported energy. Higher oil costs tend to feed into domestic inflation, eroding the real value of fixed-income securities and adding pressure on the central banks to tighten monetary policy.

Other tenors were yet to be traded as of 0029 GMT. (Reporting by Satoshi Sugiyama; Editing by Sumana Nandy)