* Ten-year yield reverses early rise as Chinese stocks tumble
* JGB 20- and 30-year yields off one-month high
* Investors still wary of sharp rise in U.S. Treasury yields
By Dominic Lau
TOKYO, June 25 (Reuters) - Japanese government bond prices rose on Tuesday, driven by concerns that a Chinese central bank engineered cash squeeze to rein in rapid credit expansion could derail growth in China, a major export market for Japan.
The 10-year yield slipped 1.5 basis points to 0.865 percent, reversing early gains after Chinese stocks fell sharply, with the Shanghai and Shenzhen composite index down 2.7 percent after earlier plunging as much as 6.8 percent. The China concerns weighed on Tokyo's Nikkei share average, which ended down 0.7 percent on Tuesday.
Earlier in the session, the benchmark JGB yield rose as much as 0.890 percent, matching a two-week high touched on Friday, as investors remained wary of tumbling U.S. Treasuries after last week's confirmation by Federal Reserve Chairman Ben Bernanke that the U.S. central bank plans to cut back on its stimulus.
The 10-year yield has been trading within a 0.80-0.90 percent range over the past three weeks, steadying from the volatility that has buffeted trade soon after the Bank of Japan stunned financial markets with a massive stimulus programme on April 4.
"Obviously, JGBs just follow the outside factors. JGB market itself doesn't have any strong direction," said a fixed-income fund manager at a Japanese asset management firm in Tokyo.
"The downside is the Treasury market. The other side is from the Chinese stock market. I am not sure going forward which is the stronger" force, he said, adding that many investors were hugging the sidelines.
Ten-year JGB futures added 0.09 point to 142.24, with 28,523 contracts changing hands, sharply below this year's daily average of 34,206 contracts.
Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments, said the JGBs and U.S. Treasuries were expected to decouple given that the Fed was likely to taper off its $85 billion a month bond-buying programme, while the Japanese central bank was supporting JGBs with its asset purchases.
"Logically, JGBs should outperform U.S. Treasuries," he said.
The 20-year yield eased 4.5 basis points to 1.730 percent, off a four-week high, while the 30-year yield was down 2.5 basis points at 1.875 percent, also coming off a one-month high hit on Monday.
BOJ Deputy Governor Kikuo Iwata ruled out using its policy ammunition to deal with temporary market turbulence, signalling that it would take a long-term decline in price expectations for him to consider additional monetary easing.
But if the central bank were to boost asset purchases in the future he would favour government bonds over risk assets, given the huge size of the JGB market.