JGBs fall ahead of debt auction in subdued trade

By Satomi Noguchi

TOKYO, Sept 3 (Reuters) - Japanese government bond futures fell on Monday, edging towards a three-week low as caution weighed in ahead of a 10-year note auction this week.

JGB futures rose initially on unexpectedly weak data on Japanese companies' capital spending for the second quarter, which supported the view that the Bank of Japan is unlikely to raise interest rates this month.

But the gains faltered in subdued trade as most investors stayed on the sidelines to see if U.S. economic data this week reinforces views that the Federal Reserve will cut interest rates at its policy meeting on Sept. 18.

Market players are also looking closely to an interest rate decision by the European Central Bank on Thursday, after ECB President Jean-Claude Trichet has sought to keep the bank's options open after the market turbulence of the past month.

Analysts said the chances of an interest rate hike by the BOJ as early as this month would diminish further if the ECB keeps interest rates on hold this week.

"If the ECB keeps rates on hold, it may bring stocks higher and bonds lower as views would be reinforced that the BOJ will keep rates steady and the Fed will lower rates in coordinated policy actions," said Jun Ishii, chief bond strategist at Mitsubishi UFJ Securities in his note to clients.

September 10-year futures 2JGBv1 fell 0.04 point to 135.31, after rising earlier to 135.42, and were edging towards a three-week low of 134.96 hit on Friday.

Traders said JGB futures fell near intraday lows on perception that BOJ Deputy Governor Kazumasa Iwata, who addressed a U.S. economic symposium over the weekend, expressed a hawkish view of monetary policy, in contrast to his usual dovish stance.