(Updates with broad Japanese market reaction to BOJ rate hike)

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.

Japan's Nikkei share average pared earlier gains to up 0.26%

at 40,062.48 as of 0405 GMT, after ending the morning session up

0.6%.

The yen was about 0.5% stronger at 155.32 per dollar

, after initially swinging between small gains and

losses immediately after the decision, which came close to the

end of the stock market's midday recess.

The two-year JGB yield ticked up an

additional half a basis point (bp) after the policy announcement

to be 1 bp higher at 0.705% on the day, a level last seen in

October 2008. The five-year yield climbed 2 bps to

0.895%, the highest since December 2008.

The BOJ hiked short-term lending rates by a quarter

point to 0.5%, which 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.

Investor focus now falls on Ueda's news conference,

scheduled for 0630 GMT, for clues on the pace of further

tightening. 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.