JGBs hold gains after BOJ stands pat as expected

* BOJ holds rates steady at 0.1 pct as widely expected

* BOJ: CPI falls accelerating, but drops likely to slow in H2

* JGBs show limited reaction to BOJ decision

By Masayuki Kitano

TOKYO, Aug 11 (Reuters) - Japanese government bonds inched higher on Tuesday, tracking the previous day's gains in U.S. Treasuries, and held on to their gains after the Bank of Japan kept interest rates on hold in a widely expected decision.

The BOJ maintained its cautious view on the economy, and said in a statement that annual falls in consumer prices were accelerating in reaction to last year's spike in oil prices.

But the bank repeated that the pace of fall would narrow in the latter half of this fiscal year ending in March 2010.

Analysts said the BOJ's decision to keep rates unchanged at 0.1 percent while maintaining its cautious outlook on the economy was in line with expectations. [ID:T328059] [ID:T252975]

"I guess it shows that they haven't become giddy even though the outlook for production is good," said Mari Iwashita, senior strategist for Daiwa Securities SMBC.

Data released last month showed that while Japan's industrial output was still 23 percent below year-ago levels, it climbed a record 8.3 percent in the April-June quarter, with manufacturers forecasting further gains in the third quarter. [JPIP1=ECI]

In coming months, the focus will be on whether the BOJ decides on a further extension to its measures to support corporate financing, after deciding last month to extend the measures until the end of the year.

September 10-year JGB futures edged up 0.03 point to 137.25 2JGBv1, little changed from 137.29 at the end of the morning session.

The 301st 10-year JGB yield was 1 basis point lower on the day at 1.445 percent JP10YTN=JBTC.

JGBs were mostly higher in thin trade after U.S. Treasuries rose on Monday as a modest stock market retreat gave investors an opportunity to bargain-hunt for Treasuries.

The two-year yield edged up 0.5 basis point to 0.275 percent JP2YTN=JBTC. The two-year/10-year yield spread stood at roughly 117 basis points, not far from a three-year high around 118 basis points hit in early June, according to Reuters data. The JGB yield curve has steepened this year, with short-term and medium-term notes drawing support with the BOJ seen in no hurry to raise interest rates, while longer-term JGBs have been pressured by worries over increasing debt issuance.

Lead three-month euroyen futures were steady on the day at 99.465 JEYv1. (Reporting by Masayuki Kitano; Editing by Joseph Radford)