(Recasts with auction results, updates prices)

By Rocky Swift

TOKYO, Sept 2 (Reuters) - Japan's benchmark government

bonds (JGBs) rallied on Tuesday after an auction of the debt saw

the strongest demand in almost two years.

The 10-year JGB yield fell 2 basis points

(bps) to 1.560% after the results. The yield had risen in the

morning session and last week it touched a 17-year high of

1.63%. Yields fall when bond prices rise.

Japan's Ministry of Finance sold around 2.6 trillion yen

($17.65 billion) of 10-year notes, receiving bids worth 3.92

times the amount sold, the highest ratio since the sale in

October 2023.

Also in focus were comments by Bank of Japan Deputy Governor

Ryozo Himino, who said the central bank should keep raising

interest rates but warned that global economic uncertainty

remains high. Himino is due to speak again in the afternoon.

Traders are currently pricing in a 46% chance of a

quarter-point increase by end-October.

Separately, on Thursday, the ministry will auction around

700 billion yen of 30-year bonds, a tenor under close scrutiny

after a series of record highs last month.

Longer-dated JGB yields have risen to historic highs of late due

to concerns about the government's debt pile and deficit

spending. Selling intensified after an electoral drubbing last

month for the political coalition of fiscal hawk Prime Minister

Shigeru Ishiba, leading to speculation that he will be forced to

resign.

Government spending requests will likely set a record for the

third consecutive year, a draft of the requests obtained by

Reuters showed on Monday. The Sankei newspaper said on Tuesday

Ishiba plans to ask ministers as early as this week to compile

an economic stimulus package.

"We continue to believe that attention should stay focused

on the upward pressure on superlong rates for now given the

numerous risk factors related to domestic politics and fiscal

policy," Yusuke Matsuo, senior market economist at Mizuho

Securities, said in a note.

The 30-year JGB yield rose 1 bp to 3.2%. It

reached an all-time high of 3.235% last Wednesday.