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PM hopeful Takaichi seen as positive for equities,

negative for

bonds

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BOJ rate hike odds drop to 20% for October

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Yields on 30-year JGBs rise to match record high

(Updates prices, adds BOJ rate hike odds in paragraph 10)

By Rocky Swift

TOKYO, Sept 8 (Reuters) - Japan's Topix share gauge

reached a record high, the yen weakened and longer-dated bonds

slid on Monday after Prime Minister Shigeru Ishiba's resignation

stoked speculation that his successor will raise government

spending.

The broad Topix gauge leapt as much as 1.3% to an

unprecedented 3,146.58. The Nikkei 225 index of blue

chip shares gained 1.45% to 43,643.81, near its own record. The

yen softened 0.4% to 148 versus the U.S. dollar.

Japanese government bonds (JGBs) were resilient at first

before falling late in the afternoon session, driving yields

higher. The 20-year yield rose 3.5 basis points

to 2.67%, while the 30-year yield jumped 6 basis

points to 3.285%, matching the all-time high hit last week.

Yields on long-dated JGBs have surged of late due to global

concerns about fiscal deficits and as pressure mounted on Ishiba

from within his Liberal Democratic Party (LDP), while the Nikkei

recently slipped from last month's all-time high.

Among top contenders in the LDP leadership race is Sanae

Takaichi, a devotee of "Abenomics" policies of Shinzo Abe -

Japan's long-time leader and former PM, who presided over

massive stimulus and unprecedented monetary easing.

"Sanae Takaichi, who is considered to have a strong

expansionary fiscal bias, could be perceived as more positive

for Japanese equities," Morgan Stanley and MUFG Securities

analysts, including Takeshi Yamaguchi, wrote.

"The risk of her favouring excessively dovish monetary

policy appears lower than last year."

Meanwhile, Takaichi has largely been seen as bad news for

Japan's already stressed bond market.

"She's known to favour stimulus measures and is viewed as

wanting the Bank of Japan (BOJ) to take a cautious stance on

policy, so that wouldn't be a great outcome for bond markets,"

Skye Masters, head of markets research at National Australia

Bank, said in a podcast.

Money markets now show about a 20% chance the BOJ will

hike its key interest rate by the end of October, down from 46%

odds a week ago.

There were 197 advancers on the Nikkei index against 26

decliners. The largest gainers were chip designer Socionext ( SOCNF )

, up 8%, followed by Mazda Motor Corp ( MZDAF ), which

jumped 7.2%.

Mitsubishi Heavy Industries ( MHVYF ), which stands to gain

from any increase in defence spending, surged 3.3%.

Advantest ( ADTTF ) and SoftBank Group, two of the

biggest beneficiaries of artificial intelligence (AI) investment

in Japan, jumped 4.4% and 2.1%, respectively.

Ishiba's relatively conservative fiscal stance has been seen

as a positive for the JGB market, where yields are relatively

low globally, though Japan's massive debt pile and widening

fiscal deficits continue to raise concerns.

The country's outstanding debt stands at nearly 250% of its

gross domestic product (GDP), the highest among developed

economies. Budget requests for the next fiscal year hit a record

for the third straight year, the finance ministry said last

week.

The JGB market was dealt a blow in mid July, when Ishiba's

coalition suffered a considerable defeat in upper house polls.

Outsider parties, campaigning on tax cuts and increased

spending, gained seats, and speculation swirled for weeks about

pressure on Ishiba to step down.

That all came to a head on Sunday, with Ishiba saying he

must take responsibility for election losses and instructing the

LDP to hold an emergency leadership vote.

The Nikkei share index hit a record high of 43,876.42 on

August 19, riding a wave of optimism for corporate governance

reforms and investment in AI.

Analysts in a Reuters poll see the index easing off that

level to 42,000 by year-end.