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UPDATE 2-Euro zone bond yields rise as Japan growth smashes forecasts

* Japan growth could signal global recovery, tighter policy

* German 10-year yield rises 2.5 bps, back above 0.40 pct

* Easing Korea tension sees Italy-Germany spread narrow

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates with graphic, updates prices)

LONDON, Aug 14 (Reuters) - Euro zone government bond yields rose 2-3 basis points across the board on Monday, bouncing from recent lows following stronger-than-expected Japanese growth.

Japan's economy expanded at the fastest pace in more than two years in the second quarter as consumer and company spending picked up, highlighting a long-awaited bounce in domestic demand.

The data further supports expectations that the global economy is on the mend and that central banks can start to unwind extraordinary monetary stimulus put in place in the wake of a series of financial and debt crises.

The yield on Germany's 10-year government bond , the benchmark for the euro zone, was up 3.5 bps to 0.42 percent in early trade, a move mirrored by most other high-grade euro zone 10-year government debt.

Japanese 10-year debt itself was flat on the day while 10-year U.S. Treasury yields were up 2.4 bps.

"The question becomes how Japanese growth could impact the very expansionary stance of central banks," said DZ Bank strategist Daniel Lenz.

"With Fed and ECB minutes coming up and a speech from (Bundesbank member) Andreas Dombret, we may find out more this week."

The minutes of the July meetings of the U.S. Federal Reserve and the European Central Bank are due to be released this week, on Wednesday and Thursday respectively, while Dombret is due to speak in South Africa later on Monday on the future of Europe and the euro.

Expectations that the ECB will follow other major central banks in unwinding stimulus have pushed yields higher since the start of the year.

However, over the past week, euro zone yields have dropped sharply as investors sheltered in the safety of euro zone government bonds with tensions brewing between North Korea and the United States.

With those concerns apparently easing a touch over this weekend, investors were able to focus instead on the Japanese data.

"The risk aversion has stabilised and investors have gotten used to the North Korea situation a little bit - as long as it doesn't escalate further," said Lenz of DZ Bank.

As of now, the calmer stance has reduced southern European government bond yield spreads over Germany's benchmark bond.

The gap between Italian and German 10-year borrowing costs, a key indicator of risk sentiment in the market, narrowed to 161 basis points on Monday, having gone as wide as 166 basis points last week.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Reporting by Abhinav Ramnarayan; Editing by Toby Chopra)