* Ex-MOF bureaucrat Muto leads BOJ selection process-sources
* Yields on 30-year bonds hit 7-week low
By Dominic Lau
TOKYO, Feb 15 Japan government bonds rose on Friday with the 30-year yield hitting a seven-week low, driven partly by news that Toshiro Muto, seen as the least dovish candidate for the governorship of the Bank of Japan, has emerged as a frontrunner for the job.
Life insurers bought longer-dated debt, while some hedge funds appeared to be cutting their bearish bets as investors, who have been expecting a more dovish candidate to get the post, reassessed their positions.
"Muto is thought to be relatively less dovish," said Yuya Yamashita, rates strategist at J.P. Morgan.
Sources close to the selection process told Reuters that Prime Minister Shinzo Abe is close to choosing his nominee to head the Bank of Japan when Governor Masaaki Shirakawa steps down on March 19.
JGBs were already showing gains before news of Muto's chances came through late in the day, and they made only a little more ground on the news.
The 30-year yield dipped 2.5 basis points to 1.930 percent, its lowest level in seven weeks, and was down 5.5 basis points this week, its largest weekly fall since July.
Tokyo's Nikkei benchmark shed 1.2 percent, while the yen extended its gains against the dollar.
Yields on benchmark 10-year bonds fell 2 basis points to 0.745 percent after trading down as much as 0.740 percent after the Muto news.
Ten-year JGB futures rose 19 ticks to 144.23, breaking above their 20-day moving average of 144.21, but they closed below the mid-session level prevailing before the report on Muto's chances.
"Life insurance companies are buying 20-, 30-, 40-year (paper). That kind of absorbs a lot of inventories that we have," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.
"We are hearing that some of the hedge funds are taking profit on yen-short position, unwinding the steepening trade," "Whenever the yen weakens, the yield curve steepens."
The yen was quoted at 92.52 to the dollar on Friday, up from a 33-month low of 94.465 touched on Feb. 11, ahead of the Group of 20 meeting in Moscow, where the yen's depreciation could be a focus.
The Japanese currency has fallen 15 percent since mid-November after Abe called for the central bank to adopt bolder policy action.
The 20-year yield inched down 1.5 basis point to 1.740 percent to a two-week low, while the five-year yield dipped 0.5 basis point to 0.140 percent, near its record low of 0.135 percent.
The short-end of the yield curve has been supported by expectations that the Bank of Japan will step up asset purchases to meet a 2 percent inflation target, while longer maturities have come under pressure due to the aggressive reflationary policies pursued by the Abe administration.