TOKYO, Aug 13 (Reuters) - Japanese government bonds

dropped on Wednesday after a five-year bond auction drew the

weakest demand in more than five years, triggering a wave of

selling by investors.

The five-year yield rose 3 basis points (bps)

to 1.070%. The 10-year JGB yield rose 2.5 bps to

1.525%.

Yields move inversely to bond prices.

The lacklustre auction followed a session in which the

10-year JGBs untraded all day, reflecting thin liquidity during

Japan's "Obon" holiday season.

"The market was worried about the liquidity and hesitated to

participate in the auction," said Katsutoshi Inadome, a senior

strategist at Sumitomo Mitsui Trust Asset Management.

The auction received bids worth 2.96 times the amount sold,

the lowest ratio since March 2020, and lower than a ratio of

3.54 times at the previous auction in July.

The level of the five-year bond yield was not high enough,

so that the market was afraid to buy bonds in case the yield

rises in the coming sessions, said Miki Den, a senior Japan rate

strategist at SMBC Nikko Securities.

JGB yields have eased from their highs in July as

expectations of a rate hike by the Bank of Japan receded,

following the central bank's caution over persistent risks to

the economic outlook.

The two-year JGB yield rose 1.5 bps to

0.785%.

Yields on longer-dated bonds fell, with 20-year JGB yield

slipping 0.5 bp to 2.515%. The 30-year JGB yield

fell 0.5 bp to 3.085%.

The 40-year JGB yield fell 1.5 basis points

to 3.285%.