JGB futures hit 4-1/2 mth low on Post Bank concern

* JGB futures drop to 4-1/2 mth low in late trade

* Fall on speculation Japan Post Bank may buy fewer JGBs

* JGBs capped before BOJ tankan corporate sentiment survey

* Tankan seen showing continued improvement in confidence

By Shinichi Saoshiro

TOKYO, March 31 (Reuters) - Japanese government bond futures fell to a 4-1/2 month low in late trading on Wednesday on speculation Japan Post Bank may buy less government debt in the new fiscal year starting on April 1, market players said.

Japan Post Bank is a subsidiary of Japan Post, the country's largest financial institution. The Japan Post group is the largest single JGB holder with about 33 percent of the market.

A document on the website of its savings and life insurance management organisation showed it was projected to buy 21.73 trillion yen ($234 billion) of JGBs in the fiscal year which starts on Thursday, down from 31.09 trillion yen projected for this fiscal year.

"This led to speculation that the entity may instead divert part of its investments into U.S. Treasuries," a trader at a foreign bank said.

June futures fell 0.17 point to 138.11 1JGBv1 in after-hours trading after hitting 138.01, their lowest since mid-November.

The yield curve has steepened sharply this quarter, with the five- and 20-year yield spread hitting its widest in a decade earlier this month as increasing supply pushed up the long end and easy central bank policy kept short dated yields down.

The yield curve flattened slightly on Wednesday as superlong bonds were supported by month-end duration extensions from index-following investors like pension funds.

JGBs were confined to a narrow range as many investors were sidelined on the last day of Japan's financial year and ahead of the Bank of Japan's quarterly tankan poll of corporate sentiment.

The tankan is likely to show confidence at firms improved for a fourth consecutive quarter thanks to solid exports, a Reuters poll showed. [ID:nTOE61E037]

"The market is heavy ahead of the tankan, and as participants are unsure whether investors like domestic banks will begin the new fiscal year by taking profits with JGBs," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

The benchmark 10-year yield edged up 0.5 basis point to 1.395 percent JP10YTN=JBTC after hitting 1.400 percent, which matched a 4-1/2 month high first touched on Tuesday. The 1.400 percent threshhold is seen as a level that attracts bargain-hunting from regional banks.

The benchmark yield rose 11 basis points this quarter. It was up about five basis points from a year earlier.

The 10-year yield has risen in the past month, boosted by steady gains in stocks, some data soothing concerns the economy could head back to a recession and a spike in U.S. Treasury yields.

The 20-year yield fell 1 basis point to 2.165 percent JP20YTN=JBTC, while the five-year yield rose half a basis point to 0.550 percent JP5YTN=JBTC.

The five-year/20-year yield spread tightened by 2 basis points to 161.5 basis points, pulling away from 167.5 basis points, the decade-wide spread reached earlier this month.

BOJ data showed the current account balance, the amount of funds parked by banks at the central bank, is seen rising to 23.4 trillion yen ($252 billion) at the end of Wednesday. That would be the highest current account balance at the fiscal year-end since March 2006.

The balance has been rising since last week, partly due to the BOJ pumping ample funds into the money market before the fiscal year-end to help offset seasonal fund demand.

Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities, said the jump in the current account balance was expected to be temporary and that the BOJ was likely to start draining excess funds after the new year starts on Thursday. (Additional reporting by Rika Otsuka; Editing by Chris Gallagher and Toby Chopra)