* Abe’s big election win lifts stocks, weakens yen
* Cements expectation of Japan’s ultra-easy monetary policy
* ECB to meet on Thursday, map out future of QE
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By Dhara Ranasinghe and Fanny Potkin
LONDON, Oct 23 (Reuters) - Euro zone borrowing costs fell on Monday as a big win for Japanese Prime Minister Shinzo Abe’s ruling bloc in a national election gave the green light for a continuation of hyper-easy monetary policy in the world’s third largest economy.
It is a reassuring sign for world bond markets as they brace for the European Central Bank to signal on Thursday that it will take small steps away from an ultra-easy monetary policy stance that has long underpinned bond yields.
Lower-rated bonds in the euro zone’s periphery, the region most dependent on central bank support, outperformed ahead of the ECB’s meeting at which it is expected to cut its monthly bond purchases but announce a lengthy extension of stimulus.
The gap between Italian and German 10-year yields shrank to its smallest in more than two months at around 156 basis points. “There is an expectation that of all the options the ECB could come out with on Thursday, it will be dovish,” said Rabobank rates strategist Lyn Graham-Taylor, explaining the rally in peripheral government debt.
Japanese government bond yields erased an early rise as Abe’s election win on Sunday reinforced a view his reflationist economic policies will remain.
The yield on the 10-year JGB initially rose to 0.080 percent, matching a 10-week high hit earlier this month, but it slipped back to 0.07 percent, flat on the day. The BOJ employs “curve controls” to cap rising yields.
The rebound in Japan set the tone for trade in European bond markets, with most 10-year bond yields down 1-4 basis points.
In Germany -- the euro zone’s benchmark bond issuer -- 10-year bond yields fell as much as 2 bps to 0.43 percent , pulling back from roughly one-week highs at 0.46 percent.
In the United States, yields on two-year bonds fell back from a nine-year peak, down 1 basis point on the day at 1.56 percent.
Trading was volatile after U.S President Donald Trump said on Monday that he would make his choice of Federal Reserve Chair “very shortly” -- a decision that could alter the path of monetary policy in the world’s largest economy.
There was little impact on Spanish bonds after Madrid said at the weekend it would take the unprecedented step of firing the Catalonian government in a bid to thwart the region’s push for independence and to calm fears of turmoil in the euro zone’s fourth biggest economy.
The premium investors demand for holding Spanish 10-year bonds over top-rated German peers was at 120 bps, compared with a five-month high of 133 bps hit earlier in October.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Dhara Ranasinghe and Fanny Potkin, additional reporting by John Geddie; Editing by Catherine Evans