JGBs inch up, soft spending data stirs BOJ doubt

TOKYO, Jan 30 (Reuters) - Japanese government bond futures inched higher on Tuesday as soft household spending data reinforced doubts about whether the Bank of Japan will raise interest rates in February.

Data showed overall household spending fell 1.9 percent in December from a year earlier, a bit worse than expected, while the jobless rate rose to 4.1 percent compared to market expectations for it to remain steady at 4.0 percent.

"I think the possibility of a February rate rise receded after last week's CPI data and these results seem to support such thinking," said Naomi Hasegawa, a senior fixed income strategist for Mitsubishi UFJ Securities.

Data showing industrial output rose by a better-than-expected 0.7 percent in December from the previous month had a muted impact, since traders are focusing more on consumption and inflation to gauge the chances for a BOJ rate rise, Hasegawa said.

March 10-year JGB futures stood at 134.45 2JGBv1 as of 0049 GMT, up 0.10 point on the day.

They inched back towards a one-month high of 134.96 hit on Friday after Japan's consumer price index (CPI) came in softer than expected, stirring doubts about whether the BOJ would raise interest rates at its Feb. 20-21 meeting.

The benchmark 10-year JGB yield slipped 1.0 basis point to 1.710 percent JP10YTN=JBTC.

Traders have been focusing on consumption-related data ever since Bank of Japan Governor Toshihiko Fukui said in December that data on personal consumption and consumer prices have been somewhat weak.

The worse-than-expected household spending and employment data may provide mild support to JGBs, said Kazuhiko Sano, chief strategist for Nikko Citigroup in Tokyo.

But since the data came at a time when investor sentiment has been dampened by rises in U.S. Treasury yields and caution ahead of a 10-year JGB auction on Thursday, the overall impact is likely to be limited, Sano said.

"They aren't negative factors but aren't major positives either," Sano said, adding that short-term bonds, such as the two-year JGBs to be auctioned on Tuesday, were likely to be the main beneficiaries.

The Ministry of Finance is scheduled to offer 1.7 trillion yen ($13.96 billion) in two-year JGBs on Tuesday.

Hasegawa at Mitsubishi UFJ Securities said the coupon rate was expected to be set at either 0.7 percent or 0.8 percent.

Market players say investors are likely to be lukewarm toward the new issue given that a rate rise in the next few months cannot be ruled out.