JGB futures flat, gains trimmed after BOJ

* BOJ leaves rates unchanged, improves economy outlook

* Yield curve flattens as short-end yields edge up

* Japan sovereign CDS widens again

By Shinichi Saoshiro

TOKYO, Nov 20 (Reuters) - Japanese government bond futures were flat on Friday, with earlier gains trimmed after the Bank of Japan kept interest rates unchanged and reiterated its commitment to a very easy monetary policy while slightly improving its outlook on the economy.

Cash JGBs also pulled back after gaining earlier on stronger U.S. Treasuries and a slip in Tokyo stocks. The yield curve flattened a touch as shorter maturity JGB yields, which are most sensitive to the central bank's policy stance, climbed.

The Japanese government is growing more worried about deflation and the risk of another recession, declaring for the first time since 2006 in its monthly report that the economy was in deflation.

Such a stance has helped feed views that the BOJ is under rising pressure to lend a hand through steps like increasing the amount of bonds it buys, but the BOJ was seen to have set itself up for a confrontation with the government after upgrading its economic assessment. [ID:nT263401]

"It is difficult to remember the last time the central bank and the government moved perfectly in step with each other," said Tetsuya Miura, chief market analyst at Mizuho Securities.

"The BOJ appears to be simply suggesting that it wants to shape its own views on the economy, so the effect on the market is likely to be limited."

December 10-year JGB futures 2JGBv1 ended Friday unchanged at 139.25 after brushing 139.56, their highest since early October.

Futures struck a three-month low of 137.29 early last week on concerns that Japan, with its public debt approaching 200 percent of GDP, may issue more bonds to cover tax revenue shortfalls and to finance budgets.

But they have bounced back sharply since then after cabinet ministers said last week the government must ensure spending plans do not rattle bond investors' confidence and said they would try to keep new JGB issuance for the fiscal year starting next April 1 below 44 trillion yen. [ID:nT280803]

The two-year yield JP2YTN=JBTC rose 1.5 basis points to 0.245 percent.

The five-year yield JP5YTN=JBTC climbed 0.5 basis point to 0.590 percent.

The benchmark 10-year yield rose 1 basis point to 1.305 percent JP10YTN=JBTC after hitting 1.285 percent, a seven-week low.

The 20-year yield was flat at 2.040 percent JP20YTN=JBTC after a solid auction of the maturity on Thursday. Dealers were reassured that investor demand for JGBs remained intact following a well-received five-year tender the previous week as regular superlong buyers like pension funds purchased the new 20-years.

The two-year/10-year spread tightened 1 basis point to 106 basis points.

JAPAN SOVEREIGN CDS WIDENS AGAIN

Japan's sovereign five-year credit default spread widened again on Friday after tightening from a seven-month high reached early last week on fiscal concerns.

Dealers said it changed hands at 70 basis points on Friday, up from around 64 basis points on Wednesday when it was understood to be last traded.

"The tightening of the spread earlier this week prompted buyers to emerge and establish fresh positions in this relatively illiquid market," said a trader at a Japanese brokerage.

Fiscal concerns fuelled the widening earlier this month but market players suggested the continuing slide in Japanese equities may have prompted the latest widening by hurting some investor confidence in the country.

The Nikkei .N225 lost 0.5 percent after reaching a four-month intraday low as concerns over the U.S. housing and labour markets hit Wall Street. [.T] (Editing by Joseph Radford)