JGB futures edge up as BOJ economic verdict awaited

* Global economic worries and Treasuries give support

* Bank of Japan expected to downgrade view of economy

* Money market futures start pricing in BOJ rate cut

By Satomi Noguchi

TOKYO, Aug 18 (Reuters) - Japanese government bond futures edged up on Monday as worries about domestic and global economies underscored the prevailing view that the Bank of Japan will keep interest rates steady in the coming months.

The market also drew support from gains in U.S. Treasuries late last week after falling energy prices reduced fears of inflation. [US/]

JGB futures rose towards a four-month high, despite slipping into negative territory at one stage. The climb comes after Friday's near full-point fall as foreign investors move to lock in profits in a holiday-thinned market.

Activity is expected to pick up this week as many investors return from Japan's "obon" summer holidays and will focus on the BOJ's two-day policy meeting that starts on Monday.

The BOJ is expected to downgrade its view of the economy and keep interest rates on hold at 0.5 percent after data last week showed the Japanese economy suffered its biggest contraction in seven years in the second quarter. [ID:nT123416]

That was followed by data showing the euro zone economy also shrank in the second quarter, in contrast with the U.S. economy, which expanded in the same period.

"The market may even start to speculate about the chances of a rate cut on the BOJ's downgrading of its view on the economy, and that may become a psychological factor pushing JGB yields lower," said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities, in a note to clients.

Money market futures JPONIBOJ=TRDT suggest some investors have started to see a small chance of a BOJ rate cut by March next year. But some traders urged caution about reading too much into the numbers, saying price moves were exaggerated as trading remained slow with few players.

September futures 2JGBv1 edged up 0.08 point to 137.77, staying in sight of a four-month high of 138.12 hit last week. They had slipped earlier in the day as midterm cash bonds came under pressure ahead of an auction and the Nikkei share average rose 1.5 percent .N225 by midday.

The lead contract had tumbled as low as 136.90 on Friday.

The benchmark 10-year yield JP10YTN=JBTC edged down half a basis point to 1.450 percent, near a four-month low of 1.415 percent touched last week.

The five-year yield was flat at 1.020 percent JP5YTN=JBTC, after rising to 1.025 percent as some dealers sold the note to make room in their books ahead of an auction of the maturity later in the week.

Analysts said that as oil prices have fallen 20 percent from a record high above $147 a barrel, the market will be keen to see if BOJ Governor Masaaki Shirakawa gives any hints about whether the central bank is more concerned about the economy than price pressures at his post-meeting news conference on Tuesday.

"That would set the tone for the five-year auction," said Satoshi Yamada, senior strategist at Nikko Citigroup.

Asked whether the BOJ had a tightening or easing policy bias, Shirakawa said last month that the central bank was in a phase where it needed to pay attention to both the economy and prices. (Editing by Hugh Lawson)