* Yen's fall to 5-year low, Fed tapering talk hurt JGBs
* Market seen under pressure at least until Fed's Dec 17-18 meeting
* Inflation-linked bonds gain on yen, GPIF report
TOKYO, Dec 13 (Reuters) - Japanese government bonds sagged on Friday, with the benchmark 10-year bond yield hitting a two-month high on the yen's slide to five-year lows against the dollar and rising speculation the U.S. Federal Reserve may reduce its stimulus.
The shock was strong enough to shake long-held confidence in the market - that the Bank of Japan's massive bond buying will keep JGB yields at abnormally low levels for the foreseeable future.
"When the yen falls this much, even the Japanese bond market is unsettled," said Tohru Yamamoto, chief fixed income strategist at Daiwa Securities.
The 10-year JGB yield rose 3.5 basis points to 0.690 percent , its highest level since Sept. 30.
Ten-year JGB futures fell 0.29 point in price to 143.85 .
The latest rise in JGB yields has led some market players to speculate the bull run may soon peter out.
The yield has risen more than 10 basis points from a six-month low of 0.580 percent hit in November after having constantly fallen in July-November as the Bank of Japan bought more than 7 trillion yen of JGBs per month.
The BOJ's purchases, amounting to 70 percent of new JGB issuance by the government, are reducing the outstanding JGBs available in the market.
Yet, the yen's latest slide has raised the prospect that the Japanese economy and inflation could grow faster than many investors believe, which theoretically reduces the BOJ's need for further easing.
The yen fell to 103.925 yen per dollar, its lowest level since the global financial crisis in 2008, boosting Japanese shares to the detriment of low-yielding JGBs.
While the BOJ's massive bond buying has made JGBs less sensitive to moves in U.S. bond yields in recent months, traders cannot ignore a rise in U.S. yields, which tends to encourage Japanese investors to buy U.S. bonds instead of domestic ones.
U.S. bond yields rose near three-month highs hit just after a solid payroll report on Friday, as more investors grew worried that the Fed could announce a reduction in its bond buying at its policy meeting on Dec. 17-18.
Although tapering from early next year is seen as a more likely scenario, traders agree that bond markets worldwide will be under pressure at least until the Fed's policy announcement.
Bucking the overall trend were inflation-linked JGBs, which gained on the yen's retreat as well as a Reuters report that Japan's biggest government pension fund will start buying them from April.
The current 10-year inflation linked bond price gained about 0.30 point.