* BOJ conducts special JGB buying operation for 2nd time
* 10-year yield pulls sharply back from 1-yr high on BOJ action
* BOJ seen to have signalled its commitment to yield curve control
* JGB gyrations impact currencies as well, dollar/yen slips
* BOJ seen facing a delicate balancing act after Trump accusations (updates with more quotes at bottom)
By Shinichi Saoshiro
TOKYO, Feb 3 (Reuters) - Japanese government bond yields were yanked back from one-year highs on Friday after the Bank of Japan conducted a special bond buying operation for only the second time, signalling that it remains committed to keeping the benchmark yield around zero percent.
The rise in yields challenged the BOJ’s commitment to its “yield curve control” scheme introduced in September, under which it guides the benchmark yield around zero percent in a bid to accelerate inflation to its 2 percent target.
Longer-dated JGB yields had surged across the board earlier on Friday on disappointment over a regular BOJ debt buying operation that excluded the purchase of superlong bonds.
But in the wake of the rise in yields, the central bank offered to buy 10-year JGBs in a special operation, dragging down the benchmark yield from its session high.
The BOJ offered to buy 10-year JGBs at a yield of 0.110 percent and said the purchase was aimed at keeping the benchmark yield at its target of around zero percent.
“Friday’s earlier yield rise was likely caused by deepening market doubts towards the BOJ’s yield curve control,” wrote Noriatsu Tanji, senior bond strategist at Mizuho Securities.
“It remains to be seen if the market’s trust towards the BOJ will recover fully after today’s special operation. But it still clearly highlighted the BOJ’s commitment towards regaining the market’s confidence.”
The benchmark 10-year yield was down 1 basis point at 0.095 percent after climbing to 0.150 percent, its highest since late January 2016.
Soichi Takeyama, fixed-income strategist at SMBC Nikko Securities said yields were unlikely to decline much further from current levels following the recent market volatility.
“Volatility has sapped investors’ strength and it could take a while before they regain their footing,” he said.
The central bank maintained a pledge to guide the 10-year JGB yield at around zero percent after its policy meeting on Tuesday, but financial markets have recently begun to speculate about when the central bank might allow long-term rates to drift higher.
The market has become jittery over the BOJ’s regular debt buying operations after receiving a rude shock late in January, when the central bank skipped a short-term JGB buying operation.
Investors have since been left wondering about the BOJ’s intentions and casting doubt on its resolve to cap bond yields.
With markets accustomed to huge bond buying by the BOJ, any sign of slowdown in its purchases has heightened market volatility and prompted market speculation it could withdraw stimulus earlier than expected.
The gyrations in the JGB market impacted currencies as well. The dollar reversed earlier losses and gained against the yen , with the pullback in JGB yields from one-year highs denting the Japanese currency’s appeal.
The dollar has gained steadily against the yen on expectations that U.S.-Japanese interest rate differentials would widen further if the Federal Reserve went through with a series of interest rate hikes. The recent rise in Japanese yields have worked against the dollar by challenging this dynamic.
“The yen might continue to weaken against the dollar after today’s action,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman.
“Some participants may have concerns about the BOJ’s previous actions, or lack of action, when JGB yields have risen, so it’s a good signal,” he said. “But my feeling is that BOJ also doesn’t want to keep expanding their balance sheet.”
The BOJ could face a delicate balancing act if U.S. President Donald Trump steps up his protectionist rhetoric or starts to take action to address perceived global trade imbalances.
Policymakers were shocked by an accusation from Trump this week that Tokyo is using “money supply” for currency devaluation.
A source close the central bank said Friday’s operation was aimed in part at showing that the BOJ is ready to take necessary steps even after Trump’s comments. (Additional reporting by Yoshifumi Takemoto and Lisa Twaronite; Editing by Kim Coghill)