(Recasts 1st paragraph, adds comments in paragraph 3 and 4,

updates yields)

By Junko Fujita

TOKYO, April 1 (Reuters) - Japanese government bond

yields fell sharply on Wednesday as investors scooped up bonds

at the start of the new fiscal year, with sentiment aided by

optimism for the de-escalation of the Middle East conflict.

The five-year JGB yield fell 5.5 basis points

to 2.30%, and the 40-year JGB yield fell 12 bps

to 3.795%. Bond prices move inversely to yields.

"Domestic banks are seen rebuilding their portfolios as the

new fiscal year started, and that supported the market today,"

said Takafumi Yamawaki, head of Japan rates research at J.P.

Morgan Securities.

"Yields on mid-term bonds are at an attractive level given

that investors now price in the Bank of Japan's policy rate to

rise as high as 2%."

The JGBs saw a heavy selloff last week, sending the

five-year bond yield to a record high, as rising oil prices

fanned fears of inflation and the BOJ's early interest hike.

Investors adjusted positions at the end of the fiscal year,

which also drove a surge in the yieldslast week, strategists

said.

The market mood changed on Wednesday as U.S. President Donald

Trump and his Secretary of State Marco Rubio said the end of the

war on Iran could be near.

The 20-year JGB yield slipped 7.5 bps to

3.205%, and the 30-year JGB yield was down 10.5

bps to 3.61%.

Trades for the super-ends were thin on Wednesday,

highlighting the concerns about an insufficient investor base in

that sector, Yamawaki said.

The market needs to be alert for another unexpected surge in

volatility, as demand for super-long bonds is supported by

foreign investors and pension funds' rebalancing needs, said

Yamawaki.

"Pension funds may sell JGBs when stocks fall," he said.