Japan's shorter-dated bond yields fall on bets of slower BOJ rate hikes

TOKYO, May 2 (Reuters) - Yields on Japan's shorter-ended bonds fell on Friday amid strong investor demand for these notes, on expectations that the Bank of Japan will not raise rates soon.

The BOJ on Thursday kept interest rates steady and sharply cut its growth forecasts, suggesting uncertainty surrounding U.S. tariffs and the hit to exports could keep policy in a holding pattern for some time.

The two-year JGB yield JP2YTN=JBTC and the five-year yield JP5YTN=JBTC both fell 1.5 basis points (bps) each to 0.61% and 0.82%, respectively.

The 10-year JGB yield JP10YTN=JBTC fell 1 bp to 1.26%.

Prices of those bonds rose sharply, and the corresponding yields fell, after the BOJ announced its cautious stance on Thursday. The rally continued on Friday.

"If we take the BOJ's statement at face value, it means that the BOJ paused the rate hike cycle," said Naoya Hasegawa, chief bond strategist at Okasan Securities.

"But the cycle may resume again. Depending on the outcome of trade talks, the BOJ may raise its outlook," he said.

Japan's top economic negotiator, Ryosei Akazawa, held talks with his U.S. counterpart, and said he aims to hold the third round of discussions again this month.

Meanwhile, China's Commerce Ministry said Beijing is "evaluating" an offer from Washington to hold talks over the tariffs.

TS Lombard strategists said JGB yields could hover at current levels as the BOJ stays cautious, with inflation in Japan unlikely to be sustainable as China's massive manufacturing surplus could add downward pressure on prices globally.

"The JGB market could prove a main beneficiary of bond portfolio flows away from U.S. Treasuries," they said in a report.