TOKYO, March 26 (Reuters) - The yield on Japan's

two-year government bond rose to a nearly three-decade high on

Thursday, as the protracted Middle East crisis added to

inflationary pressures and reinforced the need for accelerated

interest rate hikes by the central bank.

The two-year yield, which is most sensitive to

Bank of Japan rates, rose 1.5 basis points to 1.32%, the highest

since May 1996, based on Japan Bond Trading Co. data.

The yield on the five-year Japanese government bond

added 2 bps to 1.735%.

Yields move inversely to bond prices.

Japan's economy remains highly exposed to spikes in crude

oil prices due to its heavy reliance on imported energy. Higher

oil costs feed into inflation, eroding the real value of fixed

bond payments and adding pressure on the central bank to tighten

monetary policy.

A key gauge of Japan's service-sector inflation rose 2.7% in

February from a year earlier, data showed on Thursday,

reinforcing the BOJ's view that a tight labour market is

prompting firms to pass on rising costs to consumers.

Minutes of the BOJ's January meeting released on Wednesday

showed many BOJ policymakers saw the need for further rate

hikes.

Markets are now pricing in 61% possibility of a 25 bps rate

hike to 1.00% at the bank's April meeting, per LSEG data.

The benchmark 10-year JGB yield rose 2 bps to

2.270%.

The 20-year JGB yield climbed 0.5 bps to

3.110%. The 30-year yield was flat at 3.505%. The

yield on the 40-year JGB, Japan's longest tenor,

rose 1 bps to 3.73%.