* Bonds dip in subdued trade before Thurs 10-yr auction

* Nikkei rises 2 pct, adding to caution in bond market

* Investors unwind curve-flattening trades

By Rika Otsuka

TOKYO, Jan 7 (Reuters) - Japanese government bonds edged down on Wednesday in subdued trade as investors retreated to the sidelines ahead of a 10-year debt auction the next day, the first test of demand for 2009.

Longer-dated cash bonds were dented as investors continued to unwind curve-flattening trades after longer yields plunged to five-year lows last month.

The Ministry of Finance's JGB sale is a focal point in the market this week, especially after a steep rally late last year pushed the benchmark 10-year yield to a five-year low.

"Few are willing to take risks before the 10-year auction," said Tetsuya Miura, bond strategist at Shinko Securities.

"Given that the benchmark yield averaged around 1.4 percent even during the Bank of Japan's quantitative monetary policy easing era, investors are hesitant to buy JGBs at current yield levels," Miura said. Gains in Tokyo stocks were adding to the cautious mood in the bond market. The Nikkei share average .N225 rose more than 2 percent by mid-morning. March JGB futures were down 0.3 point to 138.98 2JGBv1, more than a point below a 3-½ month high of 140.15 hit last week.