TOKYO - Japan's two-year government bond prices rose on Friday, after an auction for the bonds with the same tenor witnessed a strong outcome.

The two-year JGB yield slipped 1 basis point (bp) to 0.74%. Bond yields move inversely to prices.

The auction received bids worth 3.77 times the amount sold, its best ratio since January, and was higher than a ratio of 3.58 times at the previous auction.

"The outcome showed that the market welcomed the current level yield of the two-year bonds," said Keisuke Tsuruta, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Demand was strong as bets for the Bank of Japan's interest rate increase remained weak," he added.

The two-year bond auction came as the market expects a possible cut in the sale of bonds with super-long maturities in the coming months, which could boost the issuance of shorter-dated bonds, such as two-year notes.

Last week, the yield on the 30- and 40-year JGBs hit record highs amid fiscal deficit concerns.

The yields plunged on Tuesday after Reuters reported that the finance ministry was considering reducing its sales of super-long bonds.

Investors are cautiously awaiting the finance ministry's auction for 30-year JGBs on Thursday next week.

"The markets for the two-year bonds and the bonds with super-long maturities are different," said Tsuruta.

The five-year yield fell 2 bps to 1.01%.

The 10-year JGB yield fell 1 bp to 1.505% and the 20-year JGB yield fell 3.5 bps to 2.415%.

The 30- and 40-year JGBs were not traded as of 0420 GMT.

(Reporting by Junko Fujita and Rocky Swift; Editing by Rashmi Aich)