(Updates prices following media report)

By Rocky Swift and Kevin Buckland

TOKYO, July 25 (Reuters) - Benchmark Japanese government

bonds (JGBs) fell on Friday, pushing the benchmark 10-year yield

to a nearly 17-year peak, after Bloomberg reported that Bank of

Japan (BOJ) policymakers see room to resume interest rate hikes

by year-end.

The 10-year JGB yield jumped to 1.605% for

the first time since October 2008, reversing an earlier decline.

The two-year yield, most sensitive to monetary

policy expectations, rose 1 basis point (bp) to 0.855%, and the

five-year yield gained 1.5 bps to 1.15%, both

hitting the highest since March 28.

Yields move inversely to bond prices.

BOJ policymakers expect to have enough macroeconomic data by

year-end to weigh a hike, Bloomberg reported, citing central

bank officials.

The BOJ will hold its next policy meeting on July 30-31,

though traders generally expect any rate increase will come in

October or later.

The headlines woke up a market that had been taking a

breather after outsized swings at the start of the week,

following an upper house election drubbing for Prime Minister

Shigeru Ishiba's coalition last Sunday.

Following an initial dip in yields on relief that the result

wasn't worse than opinion polls had indicated, investor worries

about a political shift toward looser policy resurfaced amid

media reports that Ishiba would soon step down, despite his

denial.

Opposition parties made notable gains in the election on

campaign pledges of increased spending and consumption tax cuts.

"There will be a fair amount of uncertainty for the time

being about the shape of the government and its fiscal policy

direction," Noriatsu Tanji, chief bond strategist at Mizuho

Securities, said.

"Concerns about fiscal expansion are likely to persist in

the market for now."

Longer-term debt, which is more sensitive to fiscal concerns

than to policy expectations, shook off the Bloomberg report.

The 20-year yield lost 2 bps to 2.56%,

declining for a second session as investors judged the run-up in

yields mid-week had been overdone.

The 30-year yield sank 3.5 bps to 3.06%,

falling for a second day.