JGBs retreat; yen, next fiscal half-year in focus

* JGBs fall, profits taken ahead of new fiscal half-year

* Thursday's BOJ Tankan also awaited

* 5-yr/20-yr spread steepest in nearly two weeks

By Shinichi Saoshiro

TOKYO, Sept 30 (Reuters) - Japanese government bonds fell on Wednesday and the yield curve steepened as some investors began taking profits ahead of the second-half of Japan's fiscal year.

But bond market activity was limited as many participants remained on the sidelines on the last day of the fiscal first-half, while some took a wait-and-see stance ahead of the release of the Bank of Japan Tankan July-September corporate sentiment survey on Thursday.

The survey is likely to show big manufacturers' business sentiment improved to its least pessimistic since December on a rebound in production and exports, a Reuters poll showed. [ID:nT326310]

"It is difficult to tell whether the market has already priced in the expected improvement in business sentiment. But investor flows related to the next fiscal half-year may have a larger effect on the market," said Akito Fukunaga, an interest rate strategist at Credit Suisse.

The JGB yield curve steepened as superlong JGBs sagged the most on profit taking by domestic investors for the second-half of the fiscal year. Dealers also had an incentive to lighten their books ahead of next week's 10- and 30-year JGB auctions, market players said.

"For the past five years JGB yields have risen in October due to investors profit taking at the start of the new fiscal half-year. But this time any rise in yields could be limited given developments in currencies and financial regulations and the state of the economy," said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.

December 10-year JGB futures 2JGBv1 fell 0.03 point to 139.34.

Futures had advanced to a near four-week high of 139.40 on Monday as the yen surged to an eight-month peak of 88.23 yen against the dollar and fanned prospects of deepening deflation. A stronger Japanese currency reduces the cost of imported goods, which in turn can push down consumer prices.

The advance in futures has stalled as the Japanese currency has pulled back from the eight-month peak, but market players were keeping a close eye on any signs of the yen going on a renewed offensive. The dollar JPY= was trading around 89.60 yen on Wednesday after being nudged away from its intraday high of 90.42 yen on trading platform EBS. [FRX/]

The 30-year yield rose 2.5 basis points to 2.185 percent JP30YTN=JBTC.

The 20-year yield climbed 2.5 basis points to 2.045 percent JP20YTN=JBTC. The benchmark 10-year yield gained 1.5 basis points to 1.295 percent JP10YTN=JBTC.

The five-year yield advanced 1.5 basis points to 0.590 percent JP5YTN=JBTC and the two-year yield edged up 1 basis point to 0.240 percent JP2YTN=JBTC.

The five-year/20-year yield spread widened by a basis point to 145.5 basis points, its highest in nearly two weeks, Reuters data showed.

Japanese industrial output rose in August but the pace of gain slowed for the fourth straight month in a sign that the impact of government stimulus spending is starting to fade. [ID:nT351414] (Editing by Joseph Radford)