* Ten-year futures rise 12 ticks after Friday sell-off
* MOF to sell 2.3 trln yen in 10-year bonds on Tuesday
By Dominic Lau
TOKYO, Jan 7 (Reuters) - Benchmark 10-year Japanese government bonds stabilised on Monday after a sell-off in the previous session, as profit-taking in Tokyo shares helped support fixed-income assets.
Yields on the 10-year bonds were unchanged at 0.835 percent after touching 0.840 percent, a 4-1/2-month high, earlier in the session. They rose 4 basis points on Friday to log their biggest one-day rise in five months as Japanese equities rallied, buoyed by a weaker yen and a deal in Washington to avert the "fiscal cliff".
The sell-off on Friday was also due to a drop in U.S. Treasury prices after minutes from a Federal Reserve meeting showed some policy makers were reticent about increasing its $2.9 trillion balance sheet further.
But a 0.8 percent fall in the Nikkei share average on Monday helped support the 10-year sector, ahead of a 2.3 trillion yen ($26 billion) auction of the same maturity on Tuesday.
Ten-year JGB futures rose 12 ticks to 143.44 after shedding 33 ticks on Friday, their biggest one-day drop in a month.
Market participants remained cautious towards JGBs after Prime Minister Shinzo Abe called on the Bank of Japan to set a 2 percent inflation target, and vowed to select a candidate who shares his views on aggressive stimulus when the term of BOJ Governor Masaaki Shirakawa expires in April. Abe's comments have weakened the yen and boosted the appeal of exporters' shares.
"Equities are the winners for now among different products. The equity rally will likely continue as long as the policy expectations continue for the Abe administration," said Maki Shimizu, a senior strategist at Citigroup Global Markets Japan.
Yields on 30-year debt edged up 0.5 basis point to 2.00 percent, touching a 13-month high, while those on 20-year bonds added 0.5 basis point to 1.790 percent.
Longer-dated maturities have come under pressure over the past several weeks on concerns about bolder reflationary policies under the new government.
Shimizu said the 10-year auction was likely to meet cautious demand, although the latest issue could carry a coupon of 0.8 percent, 10 basis points higher than that of the previous sale.
She said she expected benchmark 10-year bonds to trade at an average yield of 0.850 percent for this quarter and could be near 0.90 percent at the end of March.
A weekly gauge of sentiment in the JGB market skidded to its lowest level since July, the latest Reuters poll showed. The median forecast for the 10-year yield at the end of this week is 0.850 percent.
"We see 0.85 percent as the 10-year yield level at which investors should cover short positions and adopt a duration neutral stance versus the benchmark. Further yield upswing requires a change in the monetary policy outlook," Royal Bank of Scotland said in a research note.
"We think investors should continue to closely monitor developments over the next one to two weeks because of the uncertain mood, but the prospect of a major shift in expectations for U.S. monetary policy and the resulting impact on the JGB market is low at this point."
Benchmark 10-year JGBs lost 9.8 percent in 2012 in dollar-based terms, according to Reuters data, due to a 12.8 percent drop in the yen against the dollar, the Japanese currency's worst yearly performance since 2005.