By Shinichi Saoshiro

TOKYO, Aug 18 (Reuters) - Japanese government bonds edged up
on Wednesday, with the benchmark 10-year yield at a new
seven-year low in the face of persistent yen strength that
threatens the economic outlook and adds pressure on the Bank of
Japan to further loosen its monetary policy.

The benchmark 10-year yield fell 2 basis points to 0.915
percent, a fresh seven-year low.

That compares with the Nikkei stock average's dividend yield
of around 1.7 percent.

Higher stock prices usually result in lower dividend yields,
which tend to be lower than long-term interest rates when the
equity market is in good shape. The Nikkei's dividend yield has
been above the 10-year JGB yield for the last two years.

"It is not easy to predict how far JGB yields will fall, but
it can be said with little hesitation that yields won't rise for
a while," said Makoto Noji, a senior market analyst at Mizuho
Securities.

"The key point is the yen and its detrimental impact on
stocks. The authorities have been on the back foot dealing with
its appreciation and it is difficult imagining the currency
heading back towards 90 yen (versus the dollar) anytime soon."

That will likely cause the yield curve to continue flattening
as investors funnel money into longer-dated debt, Noji said.

The yield curve has flattened significantly this year, with
the five-year/20-year yield spread hitting a 13-month low of 128
basis points on Tuesday.

"Midterm JGBs were better supported by banks' buying and the
flattening pressure on the curve ease a bit today," said a trader
at a domestic bank.

The 10-year/30-year yield spread widened by 3 basis points to
66.5 basis points.

KAN, SHIRAKWAWA TO MEET

Japanese Prime Minister Naoto Kan and Bank of Japan Governor
Masaaki Shirakawa are expected to meet next Monday to discuss the
yen but may move the meeting forward to this week depending on
market circumstances, and participants said an earlier meeting
could indicate a sense of urgency among the authorities.

The 10-year yield has dropped more than 30 basis points this
year, with the European sovereign debt crisis and expectations of
fiscal austerity steps at home also stoking the decline.

More recently, concerns of a global slowdown, easing by the
Federal Reserve and a rally in U.S. Treasuries that took the
30-year bond yield to a 16-month low put further downward
pressure on the benchmark JGB yield.

The prospects of the Bank of Japan easing its already loose
monetary policy even further to cope with the strong yen,
deflation and slowing economic growth have also supported JGBs.

On the other hand, however, reports this week that Japan may
mull new economic stimulus steps have revived concerns about debt
supply.

Japanese media reported on Tuesday that the government may
consider measures in response to the yen's strength and stem the
economic slowdown, such as by extending a subsidy programme for
purchases of energy-efficient consumer electronics and helping
new graduates find jobs.

While the government may not immediately turn to extra debt
issuance to finance such measures, analysts said the stimulus
could be financed by funds that would otherwise be set aside to
help offset future bond issuance.

September 10-year JGB futures rose 0.18 point to 142.88,
rebounding from an early drop to 142.59. They hit a seven-year
high of 142.91 the previous day.

The 20-year yield fell 1 basis point to 1.545 percent after
climbing to 1.565 percent.

The five-year yield edged down 0.5 basis point to 0.265
percent, after brushing a fresh seven-year low of 0.260 percent.

The Nikkei rose 0.9 percent after gaining as much as 1.1
percent. The dollar stood little changed at 85.49 yen. It fell
last week to a 15-year low of 84.72 yen.

The euro shed 0.4 percent to 109.73 yen, pulling back from an
intraday high of 110.33.
(Editing by Chris Gallagher)