JGBs weaker; superlong tenors dip ahead of Thursday's 20-yr sale

* 10-yr yield touches 3-week high before paring losses

* Market shrugs off Fitch downgrade, BOJ decision to stand pat

* Fair demand expected at 20-yr sale-strategist

By Lisa Twaronite

TOKYO, May 23 (Reuters) - Japanese government bonds slipped on Wednesday as investors prepared for the next session's 20-year sale, with the benchmark 10-year yield touching a three-week high before paring losses.

The finance ministry will sell 1.2 trillion yen of 20-year bonds on Thursday. Last month's sale of that tenor met decent demand in line with expectations, even though the cash bond price at the time was flirting with lows below that offering's 1.700 percent coupon. Strategists expect decent demand this week as well.

The Bank of Japan refrained from policy changes as expected at the end of its two-day meeting on Wednesday.

Bond prices hit session lows about an hour after the central bank's announcement, in thin midday conditions, but market participants mostly attributed the move to pre-auction positioning rather than any disappointment with the BOJ.

"Dealers sold futures, but the main move was in cash bonds," said a fixed-income fund manager at a Japanese asset management firm.

"Nothing the BOJ did was a driver. Megabanks were selling ahead of the auction. Investors need a couple of basis points' adjustment," he said.

The front-month 10-year JGB futures contract ended flat at 143.25, after dropping as low as 143.05.

The 10-year bond yield rose half a basis point to 0.860 percent, after rising as high as 0.880 percent, the highest level since May 2.

It moved further away from Friday's low of 0.815 percent, the lowest level since July 2003.

FITCH'S DOWNGRADE SHRUGGED OFF

The JGB market shrugged off Fitch's move late on Tuesday to cut Japan's long-term foreign currency rating to A plus from AA and the local currency rating to A plus from AA minus, with a negative outlook for both. The ratings agency cited the country's political barriers to imposing policies to rein in its debt.

"[The downgrade] didn't have any substantial impact on JGBs so far. The JGB market is positioning itself for tomorrow's 20-year JGB auction, so that's why the superlong end of the curve is trading weaker while the short- and medium-term sectors are steady," said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.

"It seems that some investors failed to join the recent market rally, so there's decent demand to buy on dips, so we expect fair demand at the auction," she added.

The 20-year yield gained 1.5 basis points to 1.650 percent, while the 30-year bond yield added 2.5 basis points to 1.815 percent.

The market also had a muted reaction to data showing Japan posted a trade deficit of 520.3 billion yen ($6.51 billion) in April.