(Updates yields, adds analyst comment and background on BOJ

output gap data)

By Satoshi Sugiyama

TOKYO, March 27 (Reuters) - Japanese government bond

yields rose on Friday, with five-year yields hitting a record

high, as the Middle East conflict and recent central bank

signals heightened inflation concerns and led investors to

reprice the path of rate hikes.

The five-year yield rose 6 basis points (bps)

to 1.800%, while the benchmark 10-year JGB yield

climbed 8 basis points to 2.350%, a two-month high. Yields move

inversely to bond prices.

Japan remains highly exposed to spikes in crude oil prices

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

tend to feed into domestic inflation, eroding the real value of

fixed-income securities and adding pressure on the central bank

to tighten monetary policy.

The Bank of Japan's revised output gap data released on

Thursday showed demand exceeded supply capacity for a 15th

straight quarter, overturning its previous estimate that had

indicated excess supply for about five and a half years. The

outcome pointed to a greater likelihood of rising prices.

On top of the war in the Middle East, such BOJ data

suggested inflationary pressures in Japan may be more

persistent, prompting investors to be more cautious on bonds,

said Ryutaro Kimura, senior fixed-income strategist at AXA

Investment Managers.

"Up until (Thursday), rates were rising more in the swap

market, driven by foreign investors who saw Japan as

underpricing BOJ hikes relative to Europe and the U.S., and

possibly underestimating the impact of the Middle East

situation," he said.

"But today, with the move more evident in the cash bond

market, domestic investors also seem to be revising their view

towards the idea that the BOJ may have to raise rates faster and

to a higher level than previously expected."

The two-year yield, the one most sensitive to

BOJ policy rates, increased 4.5 bps to 1.38%, the highest since

May 1995.

The 20-year JGB yield climbed 6 bps to

3.180%. The 30-year yield added 4.5 bps to

3.565%. The 40-year JGB, Japan's longest tenor,

was yet to be traded, as of 0453 GMT.

(Reporting by Satoshi Sugiyama; Editing by Sumana Nandy and

Subhranshu Sahu)