* Ten-year JGB futures hits a near two-week high
* Japan's MOF to meet primary dealers on deficit financing bill
By Dominic Lau
TOKYO, Oct 26 (Reuters) - Benchmark Japanese government bonds inched higher on Friday, as Asian shares sold off on weak corporate earnings and concerns about Chinese funds facing heavy redemptions after media reported that the funds posted poor quarterly results.
Those worries weighed on risky assets, with Tokyo's Nikkei share average down 1.4 percent and the MSCI index of Asia-Pacific shares outside of Japan off 1.2 percent, while boosting the appeal of safe haven assets, such as government bonds.
The 10-year yield eased 1 basis point to 0.765 percent, hitting a one-week low, and was down 1.5 basis points this week.
Two-thirds of the 19 Nikkei companies that have reported quarterly earnings so far undershot market expectations, while 65 percent of the 57 companies in the Thomson Reuters Asia-Pacific ex-Japan index missed analysts' estimates, according to Thomson Reuters StarMine.
Ten-year JGB futures rose 20 ticks to 144.24, hitting a near two-week high and breaking above the 20-day moving average at 144.16, after trading flat in the morning session.
The Ministry of Finance (MOF) is to hold a meeting with JGB primary dealers later in the day to discuss contingency plans in case there is a delay in the passage of a deficit-financing bill.
If the Japanese parliament fails to pass the bill, it would prevent MOF from issuing bonds with which to fund government spending, a similar situation to the U.S. debt ceiling impasse last year.
Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch, said it would lead to a steepening of the yield curve, especially the longer-end sector, if the bill was not passed in the Diet.
"There are three main scenarios: the credibility issue, the economic issue and the supply & demand issue. All have different implications but eventually lead to a repricing of the yield curve in terms of a steepening," he said.
"Politicians are reasonable people and they will probably pass the bill by the end of November. Everything will be much ado about nothing. But every day, as time passes, people are starting to ponder the worst-case scenario."
Yields on both the 20-year and 30-year debt slipped 1.5 basis point, to 1.675 and 1.935 percent, respectively.
Yields on the 30-year bonds have risen 4.5 basis points so far this month.
Fujita said the rise in 30-year bond yields was probably due to political factors and investors positioning in the start of the second half of Japan's financial year ending March 2013.
Barclays Securities said any delay in debt auctions would balloon the size of monthly JGB issuance in the following fiscal year.
"To begin with, even if there is no interruption in this year's auctions, increased issuance of 200-500 billion yen per month is believed to be required for FY13, so the increase in monthly issuance including this factor would be 1.6-2.1 trillion yen," Barclays said in a report.
"This amount is huge and is sure to roil the markets. Given the size of this impact, we think the possibility of the deficit-covering bond bill not passing as something purely within the confines of a risk scenario."
The five-year yield edged down 0.5 basis point to 0.190 percent, boosted by strong expectations that the Bank of Japan would further ease monetary policy by increasing the size of its asset buying programme, when it meets next week.
The central bank now buys bonds with up to three years left to maturity in its asset purchase programme, hence supporting shorter-dated notes.