Japan's Nikkei Sinks on Recession Fears; Benchmark JGB Yields Hit 27-Year High

• Nikkei falls 2.8%, set for the biggest monthly drop since October 2008
• Short-term JGB yields fall, longer-term yields rise
• Market on edge over Middle East war, recession fears

By Satoshi Sugiyama

TOKYO, March 30 (Reuters) - Japan's Nikkei share average tumbled on Monday, while benchmark bond yields briefly touched a 27-year high before retreating, as the widening Middle East war fuelled recession concerns.

The Nikkei .N225 closed down 2.8% at 51,885.85, having fallen as much as 5.3% earlier in the session before recovering some ground. Japan's key stock gauge was down nearly 12% for the month so far, on track for its biggest monthly drop since October 2008 at the time of the global financial crisis.

The broader Topix .TOPX slid 2.9% to 3,542.34 on Monday, after earlier dropping as much as 4.8%.

The benchmark 10-year JGB yield JP10YTN=JBTC rose to 2.390%, a level not seen since February 1999. It later reversed its course and fell 1.5 basis points to 2.355%. Yields move inversely to bond prices.

"The market is probably now wary not only of inflation and an economic slowdown (from the Middle East situation), but even of a recession. In other words, negative growth — not just a simple slowdown," said Shingo Ide, chief equity strategist at NLI Research Institute.

On Monday, shorter-term bonds rose after last week's heavy selloff, as markets grew concerned about the war's drag on the economy, while longer-term yields extended their rise to a two-month high.

The two-year yield JP2YTN=JBTC, the one most sensitive to Bank of Japan policy rates, decreased 2 bps to 1.355%. The five-year yield JP5YTN=JBTC fell 3.5 bps to 1.78%.

On the other hand, the 20-year JGB yield JP20YTN=JBTC climbed 4.5 bps to 3.305%, while the 30-year yield JP30YTN=JBTC added 9 bps to 3.790%. The yield on the 40-year JGB JP40YTN=JBTC, Japan's longest tenor, rose 10 bps to 4.02%.

"The market focus has shifted to how the world could avoid the energy crisis after the Middle East war, not the fate of the war," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

BOJ Governor Kazuo Ueda said the central bank would closely watch yen moves as they affect the economy and prices, suggesting inflationary pressures from a weak currency could justify raising interest rates in the coming months.

U.S. President Donald Trump said the U.S. and Iran have been meeting "directly and indirectly" and that Iran's new leaders have been "very reasonable", as more U.S troops arrived in the region, while the Israeli military said on Monday it is attacking the Iranian government's infrastructure throughout Tehran.

There were 17 advancers on the Nikkei index against 207 decliners.

Automaker Mitsubishi Motors 7211.T led the Nikkei's decline, losing 7.9%. Chip-testing equipment maker Advantest 6857.T fell 5.2%, dragging down the index the most.