July 30, 2010 –   * Japan industrial production weaker than expected

* Caution before next week's 10-year sale limits gains

* Month-end duration extensions support superlongs

By Shinichi Saoshiro

TOKYO, July 30 (Reuters) - Japanese government bond futures edged up on Friday as Tokyo stocks sagged and after industrial output fell unexpectedly in a sign production is levelling out, but investor caution towards a 10-year debt auction next week limited gains.

The market is also waiting for U.S. second quarter GDP due later, keeping JGBs to narrow range.

"The futures led the market higher, with investors not inclined to move actively before the U.S. GDP," said Hidenori Suezawa, chief strategist at Nikko Cordial Securities.

"That said, it is the month's end and duration extensions are supporting the longer-dated maturities."

Month-end duration extensions by index-following investors such as pension funds and life insurers have helped the yield curve flatten this week.

The Ministry of Finance will offer 2.2 trillion yen ($25.3 billion) of 10-year JGBs on Tuesday. JGBs have been rallying recently and market players are wary of driving prices too high and spoiling investor appetite for the new 10-year paper.

September 10-year futures climbed 0.13 point to 141.85, edging towards a seven-year high of 142.08 struck last week.

Market players said with month-end Japanese data releases now out of the way, fewer speculators were inclined to build fresh long positions in futures based on domestic fundamentals.

Japan's industrial output fell 1.5 percent in June from the previous month, against forecasts for a 0.2 percent rise, hinting that production is petering out as export growth moderates.

The economy also remains stuck in deflation, with core CPI falling 1.0 percent in June from a year earlier for its 16th straight month of decline.

The five-year yield dipped 0.5 basis point to 0.345 percent.

The benchmark 10-year yield fell 0.5 basis point to 1.070 percent, although it was still above last week's seven-year trough of 1.045 percent.

The 20-year yield declined 1 basis point to 1.745 percent.

Tokyo's Nikkei fell 1.5 percent as technology shares were hit after weak outlooks from U.S. technology companies. (Reporting by Shinichi Saoshiro; Editing by Joseph Radford and Charlotte Cooper)