TOKYO, May 16 (Reuters) - Japanese government bond (JGB)

yields fell on Thursday, as soft U.S. inflation data and a

bigger-than-expected contraction in the Japanese economy created

fresh challenges for policymakers' efforts to raise rates from

near-zero levels.

The 10-year JGB yield fell 3 basis points

(bps) to 0.920%. The five-year yield fell 2 bps to

0.53% and the 20-year JGB yield fell 3 bps to

1.725%.

"Market sentiment has changed suddenly in Japan as

expectations for an early rate cut in the U.S. grew," said

Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust

Asset Management.

U.S. core inflation eased to its slowest pace in three

years, data showed on Wednesday, boosting expectations that the

Federal Reserve will cut interest rates twice this year.

Meanwhile, Japan's economy fell faster than expected in the

first quarter as the weak yen continued to batter consumers,

throwing a fresh challenge to the central bank's push to get

interest rates further away from near zero.

"I do not expect any rate hike by the BOJ within this year,"

said Inadome.

Still, the market will remain cautious about the Bank of

Japan's stance on yield control and any hawkish signal from BOJ

officials could prompt a sell-off in bonds, said Miki Den, a

senior Japan rate strategist at SMBC Nikko Securities.

"I think the yields will be on the rise towards the central

bank policy meeting in June. And, the BOJ will raise rates again

this year," Den said.

The market is now awaiting the BOJ's regular bond-buying

operations on Friday as the central bank may reduce the offer

amount again, said strategists.

The BOJ this week abruptly reduced the amount for bonds with

5-10 years left to maturity at its regular bond-buying

operations, even as the yields were on the rise.

That raised speculation that the BOJ is slowly allowing

yields to move more freely as one way to put a floor under a

falling yen.