(Updates prices after Japan equity market close)

By Kevin Buckland

TOKYO, Jan 24 (Reuters) -

The yen strengthened and Japanese government bond yields

rose to fresh multi-year highs on Friday after the Bank of Japan

hiked

interest rates as expected and raised its inflation

forecasts, reinforcing views it will push rates up again.

Japan's Nikkei share average shed early gains to end the day

down 0.07% at 39,931.98. It entered the midday recess up 0.6%,

with the BOJ's announcement coming shortly before the start of

afternoon trading.

The yen was about 0.5% stronger at 155.21 per dollar

as of 0633 GMT, after initially swinging between small

gains and losses immediately after the policy decision.

The two-year JGB yield rose as much as 3

basis points (bps) to 0.725% at its highest point, a level last

seen in October 2008.

"Looks like overseas investors took the Outlook Report

as hawkish," said Shoki Omori, chief global desk strategist at

Mizuho Securities, referring to the BOJ's new forecasts.

"Rates trading (is) choppy. Yields are higher but

trading volume isn't high."

The BOJ hiked short-term lending rates by a quarter

point to 0.5%. The move had been already priced into money

markets after central bank officials, including Governor Kazuo

Ueda, had clearly signalled earlier this month that policy

tightening was on the table.

In its quarterly outlook report, the board raised its

forecast for core consumer inflation to hit 2.4% in fiscal 2025

before slowing to 2.0% in 2026. In the previous projection made

in October, it expected inflation to hit 1.9% in both fiscal

2025 and 2026.

The market is currently priced for one further

quarter-point increase by year-end.

"I expect the rate will be kept the same for at least

the next six months," keeping the pace broadly the same with

hikes so far this cycle, said Kota Suzuki, a strategist at

Nomura Asset Management.

"The central bank will be a little more cautious from

now on as it will carefully assess the economic situation and

the impact of the interest rate hike."

Early gains in Japanese stocks came on the back of a

0.5% rise in the U.S. S&P 500 overnight to mark its first

closing record since Dec. 6.

The yen was supported by comments from U.S. President Donald

Trump that he thought he could reach a trade deal with China and

avoid additional tariffs.