TOKYO, Nov 25 (Reuters) - Japan's longest-dated

government bonds rallied on Tuesday ahead of a sale of

securities whose yields recently hit record highs, while

shorter-term papers fell on expectations the Bank of Japan may

be closer to raising its policy rate.

The 40-year Japanese government bond (JGB) yield

fell 1 basis point (bp) to 3.67%, retreating from

an unprecedented 3.745% reached on Thursday.

The 30-year yield edged 0.5 bp lower to

3.315%, down from a record 3.39% last week.

Yields move inversely to prices.

JGBs sank last week as details about Prime Minister Sanae

Takaichi's economic stimulus plan spurred concerns about the

nation's finances. The cabinet on Friday approved a 21.3

trillion yen ($135.95 billion) spending package, significantly

larger than the previous year's.

"The rise in interest rates reflects persistent concerns

about fiscal expansion and weak supply-demand dynamics," Mizuho

Securities chief bond strategist Noriatsu Tanji wrote in a note.

"However, in the 40-year zone, where many participants

prioritise absolute interest rate levels, the high interest rate

level itself should be positive."

Takaichi said in a speech on Friday that her spending plan

would be funded with new bond issuance if tax revenue is not

sufficient, and overall JGB issuance is expected to be smaller

than last year's.

The Ministry of Finance is due to sell about 400 billion yen

in 40-year JGBs on Wednesday. Demand at the sale may be weak due

to many unknowns about the government's financing plans, said

Naoya Hasegawa, chief bond strategist at Okasan Securities.

"The yield level is attractive, but it is not the time to

hurry up and buy bonds, with the market awaiting government

plans for JGB issuance for next year," Hasegawa said.

The BOJ is "nearing" a decision to raise interest rates,

board member Kazuyuki Masu was quoted as saying in a Nikkei

newspaper report over the weekend.

The remark follows those by Governor Kazuo Ueda on Friday

signalling the chance of a December rate hike.

The two-year JGB yield rose 1 bp to 0.96%, and

the five-year yield rose 1.5 bp to 1.325%, both

the highest since June 2008.