JGB futures jump after Fukuda, 10-year auction eyed

* Investors pick up cash bonds after Monday's sell-off

* Fukuda resignation not seen as bond moving factor for now

* Ten-year auction seen attracting enough demand

* BOJ's Shirakawa says hard to avoid slowdown

By Rika Otsuka

TOKYO, Sept 2 (Reuters) - Japanese government bond futures jumped on Tuesday, rising towards a four-month peak, as market players covered short positions and shrugged off the surprise resignation of Prime Minister Yasuo Fukuda.

Investors rushed to buy cash bonds a day after a hefty bond sell-off boosted the benchmark 10-year yield to near the 1.5 percent level, traders said.

The market reacted little to a sudden announcement by Fukuda late Monday that he had decided to step down to break a political deadlock. [ID:nT111398]

"Fukuda's resignation announcement came as a total surprise," said Chotaro Morita, chief fixed-income strategist at Barclays Capital. "But that was about it and investors found no incentive to buy or sell JGBs in the short term."

But some analysts said Fukuda's departure is seen clouding the reform outlook and potentially spurring debt-funded spending in the longer term. An increase in government debt issuance to fund steps to stimulate the slowing economy would be negative for JGBs. (For more stories on Fukuda's resignation click [ID:nT114525])

"The government is seen moving towards more bond issuance, for sure," said Atsushi Ito, a JGB strategist at Morgan Stanley.

"At the same time, it is doubtful that such a step would lift bond yields," Ito said.

He said the U.S. economy is expected to slow down again once a positive impact of a tax cut fades, hitting the Japanese economy in the medium term.

Bank of Japan Governor Masaaki Shirakawa said on Tuesday it will be hard to avoid a slowdown in the world economy, although historically growth remains at a high level. [ID:nTKU003047]

September futures 2JGBv1 climbed 0.48 point to 138.10, rising towards a four-month peak of 138.80 hit last week.

The benchmark 10-year yield JP10YTN=JBTC fell 2 basis points to 1.455 percent, after rising as high as 1.485 percent.

The 10-year yield had hit a four-month low of 1.400 percent only last Friday.

The focal point in the market is the Ministry of Finance's 1.9 trillion yen ($17.6 billion) auction of benchmark 10-year bonds on Tuesday.

The coupon was set at 1.5 percent, unchanged from last month's auction of the maturity.

Many participants expect the market to digest the new supply without any major problem as the BOJ is expected to stand pat for several months. But some are worried that it may take more than a day for the new bonds to be sold out as a rally on Tuesday morning could make investors wary of buying aggressively.

The two-year yield JP2YTN=JBTC edged down 0.5 basis point to 0.730 percent, while the 20-year yield JP20YTN=JBTC dipped 0.5 basis point to 2.125 percent. ($1=108.08 Yen) (Editing by Michael Watson)