* JGBs down ahead of 20-year bond auction on Thursday
* Nikkei rally to 52-month high also negative for JGBs
* Expectations of more BOJ bond buying underpins market
TOKYO, Feb 20 (Reuters) - Japanese government bond prices eased on Wednesday ahead of a 20-year JGB auction and on a rally in Japanese shares, lifting the five-year yield from its record low hit the previous day.
Still, on the whole, the market was underpinned by expectations that the Bank of Japan will likely expand its bond buying to five-year bonds to cater to Prime Minister Shinzo Abe's call for aggressive easing to end deflation.
Selling centred on the 20-year sector as brokers tried to make room for the auction of 1.2 trillion yen ($12.8 billion) of 20-year JGBs on Thursday.
The 20-year yield rose 1.5 basis point to 1.755 percent , underperforming all other maturities, though market players also said it was a healthy correction after the yield had fallen as much as six basis points during the past seven sessions.
In addition, a rise in Japanese share prices undermined demand for low-risk, low-return JGBs. The Nikkei share average rose 0.8 percent to a 52-month high.
The 10-year yield rose just 0.5 basis point to 0.740 percent , after having hit a 3-1/2-week low of 0.730 percent on Tuesday.
The five-year yield also rose 0.5 basis point to 0.135 percent, up slightly from a record low of 0.130 percent set on Tuesday on expectations that the Bank of Japan will soon start buying five-year bonds.
The minutes of the Bank of Japan's policy meeting showed on Tuesday a few members of the nine-member board considered extending the duration of government bonds purchased to around five years from the current limit of up to three years.
With the BOJ under heavy pressure to achieve two percent inflation, many investors expect the BOJ to soon expand its asset buying programme and include five-year bonds in the scheme.
"It's almost seen as a done deal in the market," said Takeo Okuhara, fund manager at Daiwa SB Investments. "And because everyone now thinks the five-year yield will be almost fixed (near zero), they are starting to feel it's safe to buy the seven-year zone and even longer."
Such expectations also prompted investors to snatch up the six- to seven-year zone, which still offers hefty returns compared to five-year bonds.
The yield on the 304th 10-year bonds, which have 6-1/2 years left to maturity, fell 1.0 basis point to 0.305 percent, bucking the overall market direction.
While expectations of more bond buying by the BOJ bolstered the market, some traders said they were uneasy about recent gains in JGBs in light of recent weakness in the yen.
"Bond investors still believe there will be no inflation because that's the way it has been for the past 20 years. But the yen has clearly peaked out. I think the world has changed," said a trader at a Japanese bank.
The yen traded at 93.34 yen, not far from a 33-month low of 94.47 yen hit earlier this month.
But concerns about inflation is still limited to a small number of players. A Reuters poll showed 12 out of 20 economists do not expect the BOJ to succeed in lifting inflation to two percent in the next five years. Japan's core consumer prices slipped for a second straight month in the year to December, signalling the economy was still in deflation.
Prime Minister Abe is expected to nominate the bank's new governor to succeed the current chief Masaaki Shirakawa, who will step down next month.
Sources have said Abe's short list for governor includes former deputy BOJ governor Toshiro Muto, Asian Development Bank chief Haruhiko Kuroda and another former deputy BOJ governor Kazumasa Iwata.
While difference between these candidates are seen as not big, Muto is considered mildly positive for JGBs as he is thought to prefer JGB buying as a way of easing while Iwata could be negative as he has proposed buying foreign bonds instead.
But perhaps the most negative outcome for bonds could be if Abe chooses someone completely unknown to markets.
"If we have a completely different team of governor and deputies, the market may get perplexed. That would reduce the predictability of the BOJ's policy and push up the market's volatility," said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.