TOKYO, Sept 30 (Reuters) - Japan's two-year bond yield

edged up on Tuesday after an auction witnessed the weakest

demand in 16 years, as hawkish comments from the central bank

stoked bets on interest rate hikes.

The two-year JGB yield rose 1 basis point to

0.935%, its highest level since June 2008.

"The auction was weak as investors were cautions about the

BOJ's early interest rate hike," said Miki Den, senior Japan

rate strategist at SMBC Nikko Securities.

BOJ board members debated the feasibility of raising

interest rates in the near term, with some suggesting the time

for such a move may be approaching, a summary of opinions at the

central bank's September policy meeting showed on Tuesday.

The summary followed comments from a dovish BOJ board member

Asahi Noguchi, who said on Monday the need for an interest rate

hike was increasing "more than ever."

The auction received bids worth 2.81 times the amount sold,

the lowest bid-to cover ratio since September 2009.

There are concerns about increasing supply of two-year

bonds, strategists said, as the finance ministry boosted the

amount of two-year bonds sold on Tuesday by 100 billion yen

($673.36 million) compared to the previous month's auction, to

2.7 trillion yen.

The ministry has also proposed cutting the issuance of

super-long government bonds in liquidity enhancement auctions

and reallocating their share of issuance to bonds with

maturities between one and five years.

Despite these hurdles, the increase in the two-year bond

yield was limited because traders took a cue from declines in

U.S. Treasury yields overnight, said Keisuke Tsuruta, a senior

fixed income strategist at Mitsubishi UFJ Morgan Stanley

Securities.

The 10-year JGB yield fell 1 bp to 1.63% and

the 20-year JGB yield fell 1.5 bps to 2.575%.

The 30-year JGB yield fell 2.5 bps to 3.095%.

($1 = 148.5100 yen)