JGBs edge up after Fed, gains limited

* JGBs rise after Fed cools expectations for near-term hike

* Chance of BOJ hike by year-end trimmed to 40 pct

* Gains subdued before Japan CPI, tankan data

By Eric Burroughs

TOKYO, June 26 (Reuters) - Japanese government bonds edged up on Thursday, getting a slight lift after the Federal Reserve signalled that it was more worried about inflation but left the door open to keep interest rates on hold in coming months.

The Fed's statement, after keeping rates on hold at 2 percent as widely expected, helped cool some expectations for a near-term rate increase, even as investors still expect at least two quarter-point hikes before the end of the year.

The Fed's remarks gave a boost to short-term Treasuries and, on the margins, also reduced expectations for how quickly the Bank of Japan could follow other central banks in lifting rates.

Market players have cut the chance of a BOJ rate hike in December to roughly 40 percent after having fully priced in such a move a few weeks ago, according to swap contracts on the overnight call rate JPONIBOJ=TRDT.

Analysts have said that JGBs have more room to recover and for yields to drop as investors see less risk of the BOJ hiking rates, especially as signs mount of a struggling economy hurt by the U.S. slowdown and record oil prices.

But with five- and 10-year yields having dropped more than 20 basis points in the past two weeks, further JGB gains may be grudging in the near term, they said.

"The market already seems to widely expect the BOJ to lag the Fed in raising interest rates due to the difference in U.S. and Japan CPI levels, and we do not expect any immediate correction in that balance," said JGB strategists at Barclays Capital in a note to clients.

"In this sense, it is also hard to expect JGB yields to show much downside in the front end," they said.

Investors are now looking ahead to a slew of Japanese economic indicators in coming days, including figures on consumer prices in May on Friday and the BOJ's quarterly tankan survey of business sentiment on Tuesday.

Those reports are expected to show core consumer inflation accelerating to a decade-high of 1.4 percent and the tankan's headline index of sentiment among major manufacturers falling to a five-year low.

September 10-year futures 2JGBv1 drifted up 0.09 point to 134.54. Trading volume was light, as it has been all week.

The benchmark 10-year yield JP10YTN=JBTC dipped half a basis point to 1.670 percent, holding near a one-month low of 1.665 percent struck the previous day.

The five-year yield JP5YTN=JBTC fell 2 basis points to 1.235 percent, while the two-year yield JP2YTN=JBTC was down 1.5 basis points at 0.835 percent. (Editing by Brent Kininmont)