Japanese government bonds rally as bets for BOJ rate hike fade

By Rocky Swift

TOKYO, April 20 (Reuters) - Japanese government bonds rallied on Monday as investors gauged how inflationary pressures will affect the timing of the rate increases by the central bank.

The benchmark 10-year JGB yield, which last week touched a 29-year high of 2.49%, fell 2.5 basis points (bps) to 2.395%. The five-year yield, which jumped to a record 1.9% on April 13, slid 2 bps to 1.815%. Yields move inversely to bond prices.

Bank of Japan Governor Kazuo Ueda said last week that 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.

A quarterly BOJ survey on Monday showed that inflation expectations among households held roughly steady, with 83.7% of respondents saying they believed prices will be higher a year from now.

"The market's main scenario appears to be that a rate hike will be put off next week," Miki Den, a senior Japan rate strategist at SMBC Nikko Securities, said in a note.

"However, even if an April rate hike is indeed postponed, Governor Ueda's stance at the press conference could change depending on the data available leading up to the monetary policy meeting."

The BOJ last raised its key rate in December, lifting it to 0.75%, as it seeks to normalise monetary policy after more than a decade of massive stimulus. Bets for another hike at the BOJ's April 28-29 meeting stood at about 60% earlier this month.

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 the economy. Tokyo Tanshi interest rate swaps data on Friday indicated just an 18% chance of a hike next week.

The two-year JGB yield, the one most sensitive to BOJ policy rates, edged half a basis point lower to 1.355%. (Reporting by Rocky Swift in Tokyo; Editing by Subhranshu Sahu)