TOKYO, Dec 11 (Reuters) - Japan's 10-year government

bond yield edged up on Wednesday, tracking U.S. Treasury peers

higher, as the market awaited a U.S. inflation report that is

likely to influence the Federal Reserve's rate path.

The 10-year JGB yield rose 0.5 basis point

(bp) to 1.065%. The five-year yield rose 0.5 bp to

0.73%.

Investors are also set to see a smooth rollover of futures

contracts from ones maturing in December to those

maturing in March, which are linked to the 10-year #366

JGBs once heavily owned by the Bank of Japan.

"The smooth rollover of futures contracts suggests worries

about a lack of bonds needed to settle the contracts have been

removed," said Katsutoshi Inadome, senior strategist at Sumitomo

Mitsui Trust Asset Management.

The volume for trading as well as the number of open

interest for the March contracts exceeded those of the December

contracts ahead of the official rollover date on Friday.

Markets were concerned about a potentially disruptive

shortfall of the bonds that are needed to settle the upcoming

futures contracts.

Investors need JGB #366 to close futures contracts maturing

in March. But those notes were more than 90% owned by the BOJ as

a result of its aggressive bond buying to defend the ultra-low

rate policy.

The BOJ's ownership of the bonds fell to 89% last week as

the central bank allowed market players to keep some 200 billion

yen ($1.32 billion) worth of notes it lent to them through the

securities lending facility.

The finance ministry also sold 350 billion yen worth of the

#366 bonds at its liquidity enhancement auctions in October and

November.

Strategists said the market has secured close to 1 trillion

yen worth of the notes needed to settle the March contracts as a

result of those processes.

($1 = 151.6500 yen)