UPDATE 5-BOJ says bond yield gains reflect recovery hopes

* BOJ upgrades economic view, cautious on outlook

* BOJ keeps rates on hold at 0.1 pct, no new initiatives

* Shirakawa: to decide on special measures in predictable way

TOKYO, June 16 - The Bank of Japan said on Tuesday it was confident a jump in bond yields reflected the improving global economic outlook, in a signal it was unlikely to immediately increase its buying of government debt.

The central bank upgraded its economic assessment but it was cautious about the outlook which it said was largely dependent on final demand. This demand has remained weak as companies pass on their financial pain to households through job cuts.

BOJ Governor Masaaki Shirakawa gave few hints on whether the central bank will extend its September deadline for measures put in place to ease corporate credit strains, but said it will reach a decision by then in a way that is predictable to markets.

As widely expected, the BOJ kept interest rates on hold at 0.1 percent and held off on any new initiatives at its two-day policy review.

Shirakawa told a news conference after the rate review that the fact Japanese bond yields were rising in tandem with gains in stock prices suggest that they reflect market expectations of an economic recovery.

"In Japan, bond yields haven't risen much compared to other countries so I do not expect pressure on the BOJ to increase its buying of JGBs," said Yoshimasa Maruyama, an economist at trading house Itochu Corp.

Long-term yields have climbed around the world in the past month as investors prepare for economic recovery and more government debt sales to finance stimulus spending. There is also concern that government spending will spur inflation.

Japan's government plans to sell a record 44 trillion yen of new debt in the fiscal year to March 2010 to finance its regular and stimulus spending.

Bond issuance may grow as tax revenues fall short of initial forecasts due to weak corporate earnings, which may pile more pressure on the BOJ to increase its bond buying target from the current 21.6 trillion yen ($219.8 billion), analysts say.

The BOJ has shown no sign of being perturbed by the spike in bond yields and has said its government bond buying is not aimed directly at pushing down yields. The benchmark Nikkei share average has gained more than 11 percent this year.

The BOJ said in its statement that the economy has begun to stop worsening and will likely show clearer evidence of levelling out in coming months, a less pessimistic tone than in May.

It was also a bit more positive about Japan's financial market conditions, saying that they have generally remained tight but are showing signs of improvement.

The assessment upgrade was expected, given recent sharp rises in factory output, but analysts saw no sign that the central bank is looking to end its extraordinary policies aimed at supporting corporate financing.

"It does suggest that a further move toward aggressive quantitative easing is becoming more distant," said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney.

"However, conditions are still terrible. It is too early for the BOJ to implement exit strategies."

The recession, triggered by bank failures and market turmoil that followed defaults on U.S. mortgages, has forced the BOJ and other major central banks to intervene in credit and interbank markets. There is now a global debate about when policy makers should retreat from these markets and cut stimulus spending.

Shirakawa acknowledged that corporate financing conditions have improved significantly, but he warned that companies with low credit ratings were still struggling to issue debt.

Toyota Motor Corp is set to pay on its new 10-year bonds a coupon just 24 basis points above the benchmark government bond yield, far below a 75-basis-point premium it had to pay in February. But firms with lower credit ratings are still struggling to sell corporate bonds.

The BOJ has been buying commercial paper and corporate bonds from banks to help ease corporate credit strains. The measures are currently due to expire in September. ($1=98.28 Yen)