(Updates prices after BOJ governor's press conference)

By Kevin Buckland

TOKYO, July 31 (Reuters) - Japanese stocks rose on

Thursday while the yen shed early gains after the Bank of Japan

flagged continuing risks to the economic outlook in keeping

interest rates steady.

In its quarterly outlook report, the BOJ said that although

trade talks had seen progress, uncertainty surrounding each

country's negotiations and the economic and inflationary impact

remain high.

The Nikkei share average ended the day up 1% at

41,069.82, while the broader Topix added 0.8%.

The yen was trading flat at 149.51 per dollar as

of 0753 GMT, erasing earlier gains of as much as 0.6%.

Japan's currency lost ground during BOJ Governor Kazuo Ueda's

press conference, as he said that underlying inflation was still

below the central bank's 2% target, and that monetary tightening

effectively works on demand-driven inflation rather than the

supply-driven inflation Japan currently faces.

Japanese 10-year government bond futures also

ticked higher in extended trading as Ueda spoke.

"The BOJ continues to be cautious on global risks,

especially the tariff policy from the United States," said Tohru

Sasaki, chief strategist at Fukuoka Financial Group.

"And actually, between Japan and the U.S., their

understanding of the tariff agreement is totally different, so

there's still uncertainty."

Ahead of the policy decision, traders had firmed up bets

for the BOJ to resume raising rates from as early as October

after Tokyo reached a long-awaited trade agreement with

Washington earlier this month, removing a degree of uncertainty

from the economic outlook.

The yen initially strengthened and JGB futures declined

after the BOJ's policy announcement and concurrent release of

the outlook report, after the central bank revised up its

inflation forecasts.

Cash JGB yields also initially moved higher, but were flat

to lower as investors digested the central bank's cautious

message.

The two-year yield, which is most sensitive

to monetary policy expectations, was flat at 0.82%, after

earlier rising to 0.835%.

The 10-year yield slipped 0.5 basis point to

1.085%, reversing an earlier rise to 1.565%.