By Hideyuki Sano

TOKYO, Jan 19 (Reuters) - Credit derivatives are reflecting increased investor concerns about Japan's fiscal health after the prime minister postponed a tax hike, with the cost of insurance against a default by Japan hovering near 1-1/2-year highs in the CDS market.

Government bond yields normally reflect such concerns but the Bank of Japan's (BOJ) huge asset purchase program is so large that is drives bond yields far more than market sentiment does.

While the BOJ's actions means the JGB market no longer reflects markets sentiment, the CDS market tells a story of rising investor uncertainty.

The benchmark five-year CDS rate is around 0.67 percent , having hit a peak above 0.70 percent last month. The cost has doubled from a low of around 0.33 percent in September.

Growing investor anxiety is also evident from the fact that the rise in Japan's CDS rate is also out of sync with CDS rates in other countries and Japanese private companies, which have been stable in recent months.

In contrast with sovereign CDS levels, iTraxx Japan, the index of Japanese corporate CDS, last stood at around 0.70 percent, or 70 basis points, with some analysts saying it could even fall below the level of Japan's sovereign CDS.

U.S. rating firm Moody's last month downgraded Japan's sovereign debt rating to A1 from Aa3, putting it below ratings it gives on some blue-chip Japanese firms such as Canon and Toyota Motor.

"The iTraxx has room for further tightening. Companies are likely to post earning growth this year. If the Nikkei share average rises to around 20,000, the iTraxx could fall below 60," said Takayuki Atake, manager of credit research at SMBC Nikko Securities.

Some of the differential is explained by the fact that sovereign CDS is quoted in dollars, while corporate CDS is in yen. When sovereign CDS are swapped into the yen, they are still traded around 60 basis points below the iTraxx.

But while investors may not think Japanese companies are more trustworthy than the government, the gap between the converted sovereign rate and iTraxx is at the tightest since the world financial crisis and that reflects concerns about the bulging public debt.

Abe's decision in December to delay a planned tax hike from this October to early 2017 raises more doubts about whether Tokyo can achieve the government's deficit reduction target by 2020.

In contrast, Japanese companies have been extremely cautious in taking on debt after a domestic financial crisis in the later 1990s.

According to the Bank of Japan's flows of funds data, corporate debt has shrunk 4 percent from a peak at the end of 2008.

During the same period, Japan's public debt increased about 33 percent as the government has failed to slash spending on fears that fiscal tightening could damage the economy.

(Reporting by Hideyuki Sano; Editing by Kim Coghill)