TOKYO, May 28 (Reuters) - Japanese government bonds slid

on Thursday, sending yields higher, as reports of expanded

spending rekindled worries about the nation's finances.

The benchmark 10-year JGB yield rose 3 basis

points (bps) to 2.72%, nearly unwinding the yield decline in the

previous session. The five-year yield rose 2 bps

to 1.950%. Yields move inversely to bond prices.

Prime Minister Sanae Takaichi's ruling Liberal Democratic

Party plans to use so-called "bridging bonds" to finance certain

investments, according to a draft proposal. The Nikkei newspaper

reported on the plan earlier.

Takaichi has laid out 17 strategic areas for increased

government investment. At issue is how to fund the programmes

without worsening the nation's already strained balance sheet.

"Caution is warranted regarding the possibility that

concerns over fiscal expansion will resurface," Sony Financial

Group senior economist Takayuki Miyajima said in a note.

"Reports that the government and the Liberal Democratic Party

plan to issue 'bridging bonds' to fund growth and security

investments could weigh on the market."

"Given the relatively sharp decline in rates in the previous

session, conditions appear ripe for profit-taking," he added.

U.S. Treasury yields edged lower earlier this week as hopes

for progress in U.S.-Iran negotiations eased oil-driven

inflation pressures, while euro-zone yields followed suit.

However, Japan's inflation outlook remains tilted upward, with

service-sector inflation running at 3% in April, data showed on

Wednesday, and core measures showing persistent price pressures.

In a speech on Wednesday, Bank of Japan Governor Kazuo Ueda

emphasized that temporary energy shocks could become persistent

if they feed into wages and expectations, reinforcing

speculation about a rate hike at the BOJ's June meeting.

The two-year yield, the one most sensitive to

BOJ policy rates, increased 0.5 bp to 1.385%. The five-year

yield rose 2 bps to 1.950%.