JGB futures edge up, 10-yr auction eyed for direction

* JGB futures inch up but activity subdued before auction

* Players eye 10-year JGB sale for market direction

* Investors' reduced risk tolerance capping prices

By Chikako Mogi

TOKYO, Oct 2 (Reuters) - Japanese government bond futures inched up on Thursday but activity was subdued as many traders and investors awaited the result of the first key auction for the second fiscal-half for market direction.

The Ministry of Finance will offer 1.9 trillion yen ($17.96 billion) of 10-year JGBs later in the day. The auction results will be announced at 0345 GMT. Traders said prices were capped by wariness about the auction as many suspected foreign financial institutions may not actively participate with their risk tolerance reduced sharply as a result of the credit crisis.

"Many investors prefer to move after confirming the auction result to gauge the market's direction," said Mari Iwashita, chief market economist at Daiwa Securities SMBC.

"There are few players in the market right now who can take risks and lead the market. Activity will remain subdued until the auction results are announced," she said.

December 10-year futures 2JGBv1 inched up 0.05 point to 137.09, after falling to a two-month low of 136.39 on Wednesday.

The benchmark 10-year yield JP10YTN=JBTC rose 1.5 basis points to 1.515 percent, while the five-year yield JP5YTN=JBTC edged up 0.5 basis point to 1.070 percent.

The markets awaited a U.S. Senate vote over a proposed $700 billion financial bailout, due anytime after 2330 GMT on Wednesday. Passage would set the stage for a second vote in the House of Representatives, probably on Friday. [ID:nL1596334] ($1=105.82 Yen) (Editing by Chris Gallagher)