JGBs climb on Nikkei slide, but gains kept in check

* JGBs rise on flight to safety as Nikkei hits 5-1/2-yr low

* Futures volume picks up slightly, but trading still thin

* Weak Japan trade data highlights global economy woes

* Foreign players kept selling through last week

By Masayuki Kitano

TOKYO, Oct 23 (Reuters) - Japanese government bond futures jumped on Thursday as a slide in Tokyo shares and worries about the global economy's outlook prompted investors to shift funds into safe-haven debt.

JGBs surrendered some gains as the Nikkei share average .N225 trimmed losses and finished with a drop of 2.5 percent, recovering partly on a report that the U.S. government was mulling ways to limit home foreclosures. [ID:nBNG389655]

But investors were expected to keep picking up JGBs and pushing yields lower as the global economy faces a sharp recession and the credit crisis claims victims in emerging market countries, like Hungary. [ID:nCRISIS]

A souring Japanese economic outlook and tumbling Tokyo shares add to the reasons for investors to keep money parked in ultra-safe bonds, offsetting some of the selling by foreign players yanking funds out of Japan to build up cash stockpiles.

Data earlier on Thursday showed Japanese exports grew just 1.5 percent in September from a year earlier, well below forecasts and showing that the trade-dependent economy may be falling into a recession. [ID:nT148498]

"Other than the foreigners selling yen bonds and getting out of Japan, you really don't have any JGB negatives," said Stefan Liiceanu, senior fixed-income strategist at Barclays Capital.

Weekly capital flows data from the Ministry of Finance showed that foreign investors sold a net 792.2 billion yen in Japanese bonds last week, taking the selling in the past four weeks to 3.7 trillion yen ($38 billion). [JP/CAP]

December 10-year JGB futures rose 0.50 point to 137.11 2JGBv1 but pulled back from a high of 137.82.

Trading volume picked up to 27,284 lots, the most in two weeks but still well below this year's daily average of about 39,000, with the thin conditions keeping JGB moves exaggerated.

"What is happening now is a flight-to-quality stemming from Europe," said Mari Iwashita, senior strategist for Daiwa Securities SMBC.

The benchmark 10-year yield dropped 3.5 basis points to 1.505 percent JP10YTN=JBTC, and the five-year yield fell 4 basis points to 1.050 percent JP5YTN=JBTC.

Bank of England Governor Mervyn King said earlier this week that the British economy was probably entering its first recession in 16 years, stoking investor fears about a steep economic downturn in Britain and other European nations.

Kazuya Ito, fund manager at Daiwa SB Investments, said 10-year yields could fall towards 1.3 percent soon.

"There is a possibility of 10-year bond yields falling towards the 1.3 percent level either this month or next month," he said.

Although overall JGB demand is expected to be solid, a decline in risk appetite meant shorter-term notes were likely to favoured over long-term bonds.

"It is hard to buy (long-term bonds) actively because market liquidity has fallen. If you get caught, you could be forced to dump the position at horrible levels," said a trader for a U.S. financial institution.

In addition, the sharp slide in Tokyo shares has increased incentives among domestic investors to take profits in bonds where possible, and overseas investors have also been selling their JGB holdings, said Atsushi Ito, fixed-income strategist for Morgan Stanley. (Additional reporting by Kaori Kaneko; Editing by Edwina Gibbs)