TOKYO, Oct 10 (Reuters) - Japanese government bond prices dipped on Tuesday as Tokyo stocks hit a two-year high and reduced investor demand for safe-haven debt.
The benchmark 10-year JGB yield was half a basis point higher at 0.055 percent.
It rose to 0.065 percent earlier in the session in a reaction to Friday's surprisingly stronger U.S. September wages data, which enhanced already high expectations that the Fed would hike rates for a third time in 2017.
The Japanese financial markets were closed on Monday for a national holiday and had their first chance to react to the robust U.S. wages data on Tuesday, with the Nikkei climbing to its highest level since August 2015.
There were renewed worries that North Korea may be preparing another missile test.
But geopolitical concerns were not enough to prevent Tokyo stocks from rising, albeit modestly, in turn nudging JGB yields up.
Campaigning began on Tuesday for an Oct. 22 election that pits Japan Prime Minister Shinzo Abe's Liberal Democratic Party against the fledgling Party of Hope led by Tokyo Governor Yuriko Koike and other smaller parties contesting seats in the country's more powerful lower house of parliament.
"JGB market players are likely seeing three potential outcomes for the elections. The first scenario is a resounding win for (prime minister) Abe, resulting in a monetary policy status quo and thus maintaining tight JGB supply conditions," wrote Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities, referring to the large debt purchases the Bank of Japan currently conducts.
In the second scenario, Abe barely wins and loses grip on ruling party leadership, and in the third scenario, Abe loses the elections outright. Both scenarios are likely to lead to JGB selling as they could result in BOJ leadership that is less conducive to the very easy monetary policy currently in place, Inadome said.
BOJ Governor Haruhiko Kuroda's term expires in April 2018 and there was growing speculation that Abe will reappoint him for a second term. (Reporting by the Tokyo markets team; Editing by Sherry Jacob-Phillips)