JGBs rise on expectations of more BOJ easing steps

* 10-year yield marks biggest one-day drop since August

* Yen's surge, after remarks by econ min, helps lift JGBs

* Market sentiment improves but still negative - survey

TOKYO, Jan 15 (Reuters) - Japanese government bond prices rose on Tuesday, with the benchmark yield marking its biggest one-day drop since August, as investors covered short positions on growing expectations that the Bank of Japan will take more easing steps as early as next week. A sharply stronger yen also gave the JGB market a lift, after Economics Minister Akira Amari said excessive yen weakness could have a negative effect on the country. His remarks helped the yen rebound from a 2-1/2-year low against the dollar. The 10-year JGB yield fell 4 basis points to 0.770 percent, its lowest since Dec. 26. Last week, the yield touched a 4-1/2-month high of 0.840 percent. "This is pretty much a short-covering rally," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments. He cited downward moves in U.S. and German yields when Japanese markets were closed for a holiday on Monday, as well as the growing market consensus that the BOJ will take more easing steps next week. Benchmark 10-year Treasuries rose on Monday after Federal Reserve Chairman Ben Bernanke offered no hints the U.S. central bank would back away from its ultra-loose monetary policy. But Tuesday's rapid move down in JGB yields does not necessarily presage a return to low rates, Matsukawa said, nor a signal that the market endorses Prime Minister Shinzo Abe's aim to push the BOJ to print more money. "The market moves very rapidly when expectations are high and when we see the actual reality, then maybe it stops moving. That's how the market behaves," he said. The dollar's downward correction against the yen also buoyed the JGB market on Tuesday, he said. The dollar dropped as much as 1 percent to 88.62 yen after Amari's remarks, moving away from Monday's high of 89.67 yen.

BOJ Governor Masaaki Shirakawa said on Tuesday the central bank would continue with powerful monetary easing. "The market has priced in additional easing by the BOJ next week," said Naomi Muguruma, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. Sources close to the central bank said it would consider expanding stimulus again and double its inflation target to 2 percent at its meeting on Jan. 21 and 22. The bank has been under pressure from Abe for bolder action to beat deflation.

"Some of the concerns about supply/demand deterioration have been relieved, so now the focus is on the BOJ's monetary policy, which encourages investors to buy JGBs on dips," Muguruma said. The benchmark 10-year JGB futures contract ended up 0.39 point at its session high of 144.14, its highest since Dec. 21. The yield on the 20-year bond fell 3 basis points to 1.760 percent, moving away from its intraday high on Friday of 1.805 percent, its highest since April 2012. The 30-year yield dropped 1.5 percent to 2.000 percent, moving away from its Friday session high of 2.025 percent, which was its highest since August 2011. A weekly gauge of sentiment in the Japanese government bond market improved in the latest week, supported by expectations of more BOJ easing steps, but remained solidly in negative territory, the latest Reuters poll showed on Tuesday.