Short-term JGB yields poised for weekly drop as bets for BOJ rate hike ease

By Rocky Swift

TOKYO, April 17 (Reuters) - Yields on short-term Japanese government bonds (JGBs) were set for a weekly decline on Friday as expectations eased for any rapid interest rate increases by the central bank.

The two-year yield, the one most sensitive to Bank of Japan policy rates, increased 1 basis point (bp) to 1.365%, but was set for its first five-day slide in a month. The benchmark 10-year JGB yield rose 1 bp to 2.410%. Yields move inversely to bond prices.

Earlier this month, interest rate swaps data indicated a more than 50% chance that the BOJ would hike its key rate, currently at 0.75%, at the end of its April 28-29 meeting.

But recent signals from central bank officials have reduced those expectations, as imported energy costs from the Middle East crisis cloud the inflation picture and risk a slowdown in Japan's economy. Swaps now point to just a 20% chance of an April rate hike, according to Tokyo Tanshi.

"Against the backdrop of persistently elevated crude oil prices, U.S. long-term interest rates have risen, and that trend is likely to carry over into the domestic bond market, making them vulnerable to selling pressure," Takayuki Miyajima, senior economist, Sony Financial Group, said in a note.

"Fading expectations for BOJ rate hikes are also adding to yen-selling pressure."

Speaking in Washington after meetings at the International Monetary Fund (IMF), BOJ Governor Kazuo Ueda said a decision on how soon to raise interest rates must take into account the fact that the nation's real interest rate is low.

Japan is facing rising inflation from a "negative supply shock," which is more difficult to rein in with monetary policy than inflation driven by strong demand, Ueda said.

The 20-year JGB yield slid 1 bp to 3.245%. The 30-year yield fell 2 bps to 3.585%.

The five-year yield rose 1 bp to 1.830%. (Reporting by Rocky Swift and Satoshi Sugiyama in Tokyo; Editing by Subhranshu Sahu)