JGB yields fall as inflation cools, PM Takaichi reiterates fiscal pledge

By Rocky Swift

TOKYO, Feb 20 (Reuters) - Japanese government bonds rose on Friday after cooling inflation reduced the urgency for central bank rate hikes and Prime Minister Sanae Takaichi reiterated her pledge to pursue "responsible" fiscal policy.

The benchmark 10-year JGB yield JP10YTN=JBTC fell 3.5 basis points (bps) to 2.105%. The two-year bond yield JP2YTN=JBTC, the one most sensitive to Bank of Japan policy rates, decreased 0.5 bp to 1.25%. The five-year yield JP5YTN=JBTC slid 2.5 bps to 1.605%. Yields move inversely to bond prices.

Japan's annual core consumer inflation hit 2% in January, the slowest in two years, data showed on Friday. That's in line with the BOJ's projection that said inflation will briefly slow below its 2% target.

A continued drop in food price growth could "provide an opportunity for the Bank of Japan to ease its hawkish stance on inflation," Noriatsu Tanji, chief bond strategist at Mizuho Securities, wrote in a note.

Long-term JGB yields surged to record highs last month as concerns about Japan's fiscal health swelled after Takaichi, a fiscal dove, called a snap election and pledged to cut sales taxes on food for two years. But a measure of calm has returned to the market following her party's landslide victory, with yields falling and resilient demand seen at JGB auctions.

On Friday, Takaichi spelled out her policy objectives while pledging to avoid "reckless fiscal policies that undermine market confidence."

"It may be that Japan's one-party dominance system is attracting global attention amid political instability in major developed nations, thereby stimulating demand from investors who previously showed little interest in JGBs," Ataru Okumura, a senior strategist at SMBC Nikko Securities, said in a report.

The 20-year yield JP20YTN=JBTC slid 3 bps to 2.925%, set for a fourth-straight weekly decline. The 30-year yield JP30YTN=JBTC dipped 1 bp to 2.925%, while the yield on the 40-year JGB JP40YTN=JBTC, Japan's longest tenor, fell 2.5 bps to 3.55%.