JGBs fall, market focuses on tankan's bright spots

By Naomi Tajitsu

TOKYO, Dec 14 (Reuters) - Japanese government bonds fell on Friday after a Bank of Japan business survey showed that capital spending strengthened even as problems in the U.S. subprime mortgage market cloud the economic outlook.

The central bank's quarterly tankan poll showed that big manufacturers expect spending to rise a higher-than-expected 10.5 percent this fiscal year, up from 8.7 percent in the September poll.

Smaller companies were more optimistic about the economy even as sentiment at large manufacturers hit a two-year low, the poll showed.

"The outlook isn't that strong, but it offers some assurance that sentiment has not decreased as much as some had feared," said Hitomi Kimura, a fixed income strategist at J.P. Morgan Securities.

March futures 2JGBv1 ended the morning session 0.39 point lower at 136.35, pressured by a 0.6 percent climb in the Nikkei share average .N225 by midday.

The yield on the benchmark 10-yr JGB <JP10YTN=JBTC> rose 3.5 basis points to 1.545 percent, edging closer to 1.585 percent hit on Tuesday, its highest since early November.

The two-year yield <JP2YTN=JBTC> was unchanged at 0.735 percent, keeping its distance from a 14-month low of 0.695 percent hit earlier in the week.

The five-year yield <JP5YTN=JBTC> rose 2.5 basis points to 1.070 percent, closing in on a one-month high of 1.090 percent hit on Monday.