JGBs rise on bets BOJ will keep rates steady next week

By Junko Fujita

TOKYO, April 21 (Reuters) - Japanese government bonds rose on Tuesday on growing bets that the Bank of Japan will not increase interest rates at its policy meeting next week to spend more time gauging the fallout from the Middle East conflict.

The 10-year JGB yield fell 2 basis points (bps) to 2.375%. The two-year yield declined 1 bp to 1.345% and the five-year yield fell 1.5 bps to 1.8%. Yields move inversely to bond prices.

The BOJ is likely to hold off raising rates next Tuesday, as fading prospects of a near-term end to the Middle East war keep the country's economic and price outlook highly uncertain, Reuters reported, citing sources.

"In my view, the BOJ is already behind the curve in dealing with rising prices. And it will maintain its fighting pose to raise rates by July," said Shuichi Ohsaki, a senior portfolio manager at Meiji Yasuda Asset Management.

Swap rates indicate only a 7.78% chance of the BOJ raising rates by 25 basis points to 0.75% next week and around a 90% probability of rates rising by 50 bps from now to 1.25% by the end of this year.

The one-year swap rate two-year forward hovered around 1.93% on Tuesday, indicating that the BOJ's terminal rate will be around that level.

The central bank is seen raising rates a few more times next year, but that will be more challenging, given that hawkish board members Naoki Tamura and Hajime Takata will end their terms next year, said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

Japan's parliament in March approved Prime Minister Sanae Takaichi's choice of two like-minded monetary doves to join the central bank board this year.

Yields on super-long ends also fell, with the 20-year JGB yield slipping 1.5 bps to 3.215%.

The 30-year yield fell 1.5 bps to 3.545%. The yield on the 40-year JGB fell 1.5 bps to 3.77%. (Reporting by Junko Fujita; Editing by Subhranshu Sahu)