TOKYO (XFN-ASIA) - Japanese government bond prices closed mostly lower as investors cashed out of the debt paper market after an annual survey of land prices in metropolitan areas rose for the first time in 16 years, indicating that Japan's deflationary years may be coming to an end, dealers said.

Trading was also tempered by caution ahead of the US Federal Open Market Committee Meeting Wednesday and the release of US August producer prices data later tonight, they said.

At the close, the yield on the two-year debt was at 0.660 pct, up from 0.635 pct at the close Friday, while the yield on the lead five-year note had risen to 1.175 pct from 1.135 pct.

The yield on the bellwether 20-year bond was at 2.165 pct, up from 2.130 pct, and the yield on the 30-year bond was at 2.400 pct, up from 2.370 pct.

Average land prices in the Tokyo, Osaka and Nagoya metropolitan areas rose in the year to July 1 for the first time in 16 years, according to the results of a survey by the Land Ministry.

Economists said the data was further evidence that the economy was coming out of deflation, even though the nationwide average price of land declined again for the 15th year in a row.

'The upbeat land price data, which came as hard evidence that Japan is no longer mired in asset price deflation, is clearly a negative lead for the JGB market,' said Infroma Global Markets (Japan) senior economist Kenji Arata.

'Although the land prices data do not suggest any imminent need for rate hikes, it still signals that the Japanese economy continues to mend, and that the Bank of Japan can hike interest rates eventually,' he said.

Technically driven selling also pressured JGB prices as short-term traders moved to square their positions ahead of the FOMC meeting Wednesday and the release of US producer prices data for August later tonight, dealers said.

Adding to the cautionary tone is tomorrow's election of a new Liberal Democratic Party leader, with Shinzo Abe, currently chief cabinet secretary, tipped to be the strong candidate, they said.

'As Abe himself has not presented any clear economic policy, the market will focus on [who will be the] new cabinet members,' Lehman Brothers strategist Makoto Yamashita said.

Last Friday, Internal Affairs Minister Heizo Takenaka tendered his resignation ahead of Abe's imminent selection as Japan's next leader, raising concern among foreign investors that he may be quitting because Abe will not be as aggressive in pushing for structural reforms as his former boss.

Takenaka has been the symbol of Junichiro Koizumi's reform policy and was the brains behind Koizumi's pet project of privatizing Japan's massive postal system, which has more than 3 trln usd in savings and insurance assets.

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