Japanese government bonds hold steady as budget fears wane ahead of BOJ

By Rocky Swift

TOKYO, Oct 29 (Reuters) - Japanese government bonds (JGBs) held steady on Wednesday as concerns of a blowout in the nation's finances waned and investors awaited the central bank's rate decision the following day.

The benchmark 10-year JGB yield JP10YTN=JBTC rose 1 basis point (bp) to 1.65%, retracing from a 2.5 bp decline in the prior session. The five-year yield JP5YTN=JBTC rose 1.5 bp to 1.230%.

Yields move inversely to prices.

Prime Minister Sanae Takaichi told visiting U.S. President Donald Trump on Tuesday that she was determined to bolster Japan's defence capabilities. That followed a policy speech on Friday, in which Takaichi said she aimed to meet a defence spending goal of 2% of gross domestic product (GDP) in the current fiscal year, above a previous target.

Concerns that the U.S. might demand an increase in defence spending to as much as 5% of GDP appear to have been avoided, according to Mizuho Securities chief bond strategist Noriatsu Tanji.

"It is reasonable to conclude that the increase in defence spending will not cause the overall budget size to balloon," Tanji wrote in a note.

Worries around a rise in spending have put upward pressure on yields of super-long-dated bonds of late. The 30-year JGB yield rose to a record high of 3.345% earlier this month after fiscal dove Takaichi was elected as the leader of the ruling Liberal Democratic Party, and then later was made premier.

The 30-year JGB yield JP30YTN=JBTC was flat at 3.060% on Wednesday.

Most analysts expect the Bank of Japan will keep interest rates steady at 0.5% at the end of its two-day meeting on Thursday. Two hawkish BOJ board members are likely to repeat their proposals made in September to hike rates to 0.75%.

U.S. Treasury Secretary Scott Bessent urged Japan's government on Wednesday to give the central bank scope to raise interest rates, escalating his warning to Tokyo against keeping the yen too weak through prolonged low borrowing costs.