JGBs gain after first BOJ rate cut in 7 years

* BOJ cuts rates by 20 bps to 0.30 pct

* JGBs erase losses and gain after rate cut

* Sharp Nikkei plunge also buoys bonds

By Shinichi Saoshiro

TOKYO, Oct 31 (Reuters) - Japanese government bonds gained on Friday, recovering from an earlier drop after the Bank of Japan cut interest rates for the first time in seven years, joining a global wave of monetary easing to contain a worldwide financial crisis.

The Nikkei average's .N225 5 percent slide also underpinned JGBs.

The bond market moved nervously prior to the BOJ's monetary policy decision, rising early in response to weaker Tokyo shares but tumbling when the central bank meeting dragged on longer than usual.

But JGBs trimmed losses after the BOJ announced that it would cut interest rates by 20 basis points to 0.30 percent. The BOJ policy board's vote was split 4-4, with Governor Masaaki Shirakawa casting the deciding vote. [ID:nT242225]

December 10-year futures rose 0.07 to 137.98, pulling back from a low of 137.07 2JGBv1.

The benchmark 10-year yield dipped 1.5 basis points to 1.470 percent after hitting 1.520 percent. JP10YTN=JBTC

"The market had expected a 25 basis point cut, but it still showed a positive reaction to the easing decision by the BOJ," said Satoshi Yamada, a senior strategist at Nikko Citigroup.

The BOJ also said it would cut its Lombard rate to 0.50 percent from 0.75 percent and would start paying interest on excess reserves of commercial banks held at the central bank until the March reserves period.

"It is noteworthy that the policy board's vote was split at 4-4, which gives the impression that dissent towards a cut was strong," said Yamada at Nikko Citigroup.

Market watchers said that after Friday's split vote the central bank could have an increasingly difficult time making further policy decisions.

"Monetary policy for central banks points toward easing as the global economy and financial systems are in a slump," said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities.

"The (BOJ) policy board's split vote suggests that the BOJ may not be able to keep abreast if global economic conditions worsen and prompt another round of coordinated easing," Ishii said.

The yield curve steepened with the short- and medium-term maturities outperforming after the BOJ's easing announcement.

Analysts said yields in these maturities still had more downside as investors moved to fully price in a rate cut now that the BOJ has actually eased.

Longer-dated JGBs had had a rate cut mostly factored in but drew mild support from month-end duration extensions by index players such as pension funds, analysts said.

The two-year yield declined 4.5 basis points to 0.540 percent JP2YTN=JBTC and the five-year yield fell 3 basis points to 0.855 percent JP5YTN=JBTC.

The spread between the two- and 20-year JGB yields was at 157.5 basis points on Friday, the steepest in seven months. The spread widened by about 20 basis points from a month earlier.

The yield spread widening came at a time when Tokyo shares declined sharply. The Nikkei dropped 24 percent in October, its biggest ever monthly decline. (Editing by Michael Watson)