TOKYO, Jan 31 (Reuters) - Japan's 10-year government

bond yield rose to a two-week high on Friday as market

participants braced for a faster pace of Bank of Japan policy

tightening as prices continue to rise.

The 10-year JGB yield rose 3.5 basis points

(bps) to 1.245%, its highest level since Jan. 15.

The yield reached that level even as Bank of Japan Governor

Kazuo Ueda said the central bank must maintain loose monetary

policy to ensure underlying inflation gradually accelerates

toward its 2% target.

"The market is now very sensitive about further interest

rate hikes and what the neutral rate would be," said Miki Den,

senior Japan rate strategist at SMBC Nikko Securities.

"So investors react to any kind of comments from BOJ

officials that are related to the monetary policy."

Ueda spoke after data showed core inflation in Japan's

capital hit 2.5%, marking the fastest annual pace in nearly a

year, well exceeding the central bank's 2% target.

The market expects the BOJ to raise rates one more time this

year, but some expect that there could be two more rate hikes

this year as the yen remains weak against the U.S. dollar, a

cause for rising import costs.

On Thursday, Ueda's deputy Ryozo Himino said that the

central bank will continue to raise interest rates if the

economy and prices move in line with the bank's forecasts.

The BOJ raised interest rates to 0.50% from 0.25% last week

on the view that wages will continue rising and keep inflation

stable around its 2% target.

The two-year JGB yield rose 1 bp to 0.72%. The

five-year yield rose 2.5 bps to 0.905%.

The 20-year JGB yield rose 4 bps to 1.94% and

the 30-year JGB yield rose 2 bps to 2.285%.

The 40-year JGB yield rose 1.5 bps to

2.655%.

(Reporting by Junko Fujita; Editing by Mrigank Dhaniwala)