JGBs rise on Nikkei drop, eyes on BOJ rate verdict
*Futures rise on Nikkei drop
*Five-year yield drops further to 6-month low
*Investors waiting to see if BOJ will cut rates
TOKYO, Oct 31 (Reuters) - Japanese government bonds rose on Friday as Tokyo shares fell, but trading activity was muted with investors nervously waiting to see if the Bank of Japan will cut interest rates later in the day.
Investors believe monetary easing by the BOJ at Friday's meeting is almost inevitable after share prices around the world rallied this week on optimism that rate cuts by major central banks will ease a looming global recession. [ID:nT242225]
If the BOJ cuts rates it would be the first such move in seven years. Governor Masaaki Shirakawa is to speak at a news conference in the afternoon.
"If the result is other than a 25 basis point rate cut, the yen could rebound sharply and stocks may fall. JGBs could rally as a result and move in such a way as to create pressure for an interest rate cut," said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities, in a note to clients.
December futures 2JGBv1 climbed 0.48 point to 138.39 after rising more than half a point as the Nikkei share average .N225 fell about 4 percent at one stage in early trade.
The benchmark 10-year yield JP10YTN=JBTC dipped half a basis point to 1.480 percent after falling as low as 1.455 percent.
Short- and medium-term maturities -- sectors sensitive to a shift in expectations on BOJ monetary policy -- extended their gains with investors hoping to see bond prices rise further if the BOJ actually cuts rates.
The five-year yield slid as low as 0.855 percent, a six-month low, before retreating a tad to 0.860 percent, JP5YTN=JBTC down 2.5 basis points on the day.
The two-year yield JP2YTN=JBTC fell half a basis point to 0.580 percent, near a six-month low of 0.560 percent marked on Thursday.
"The market still only half believes in a BOJ rate cut," said a bond trader at a Japanese bank.
"If the BOJ lowers rates, short-term bond yields should fall further," the trader said.
Market players had believed until earlier this week that the BOJ would only cut rates as a last resort after the central bank opted to broaden its money market operations earlier this month, since overnight rates are already set at a low 0.5 percent. Continued...
