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TOKYO (Thomson Financial) - Japanese government bond prices finished the morning session Wednesday mostly lower with investors pocketing profits on some tenors going into a central bank policy meeting that is expected to see the monetary authority leave its interest rates unchanged.

After widespread anticipation of a rate hike this month following upbeat economic data including strong second quarter GDP, recent turbulence in financial markets has dashed those expectations.

At the same time the market will still be keenly awaiting comments from Bank of Japan (BoJ) governor Toshihiko Fukui at the conclusion of the two day meeting, for any hints on the future timing of rate action.

"Although the market has priced in the likelihood that the BoJ will forego a rate hike this time, as long as views remain that the central bank may hike rates going forward, the JGB market is unlikely to be able to extend gains much beyond current levels," Mitsubishi UFJ Securities senior economist Tatsushi Shikano said.

"Besides, yields have already fallen to levels that do not reflect economic fundamentals in Japan," he said.

At the same time lingering uncertainty about tighter credit stemming from the US subprime mortgage troubles will continue to see some safe haven buying of bonds.

In the stockmarket the blue-chip Nikkei 225 Stock Average ended the morning down a modest 0.2 percent, while the broader TOPIX index fell 0.4 percent.

The Bank of Japan refrained from pumping additional funds into the money market this morning after interest rates eased back slightly. It is the first time in five days it has refrained from injecting extra liquidity.

At the lunch break, the yield on the benchmark 10-year bond was at 1.555 percent, down from 1.560 percent at the close Tuesday.

The yield on the two-year note rose to 0.845 percent from 0.840 percent, while the yield on the five-year note moved up to 1.110 percent from 1.105 percent.

The yield on the 20-year bond rose to 2.045 percent from 2.035 percent, and the yield on the 30-year bond edged up to 2.325 percent from to 2.315 percent.

Bond prices move inversely to yields.

The price of the September futures contract for 10-year bonds fell to 136.03 yen from 136.10 yen at the close Tuesday.

(1 US dollar = 114.37 yen)

yasuhiko.seki@thomson.com

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yas/mb

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