February 10, 2017 / 6:06 AM / in 6 months

BOJ increases bond buying, JGB yields kept in check for now

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TOKYO, Feb 10 (Reuters) - The Bank of Japan increased its buying in "superlong" bonds on Friday, helping to keep their rising yields in check for now, though its policy to control the JGB yield curve looks set to face more challenges, not least from Washington.

The BOJ bought 320 billion yen of bonds with maturity of more than 10 years to 40 years on Friday, 20 billion yen more than its usual buying of 300 billion yen in those maturities.

It was only the second time the BOJ increased buying in that sector since late September when the BOJ introduced the "yield curve control" policy, in which it keeps the 10-year yield around zero percent and actively tries to manage the yield curve.

The 20-year yield dipped 1.0 basis point on the day to 0.670 percent, hitting its lowest level in more than a week and off the one-year high of 0.730 percent hit last week.

The benchmark 10-year JGB yield was up 0.5 basis point at 0.085 percent, however, and other maturities were narrowly mixed.

The BOJ's move was largely a surprise and some market players considered it unnecessary given that market sentiment was already on the mend after Thursday's auction of 30-year JGBs.

"It was a surprise. Perhaps the BOJ was worried that Japanese bonds could falter after U.S. President Donald Trump's talk of phenomenal tax cuts," said Koichi Sugisaki, vice president of research at Morgan Stanley MUG Securities.

The BOJ has been doing damage-control since the unusual approach it took its bond buying on Jan. 25 confused the market as to its intentions.

By skipping widely anticipated buying in short-term bonds that day, the BOJ reduced its bond buying in January to the lowest level since October 2014, sparking speculation it may be seeking to gradually taper off its bond purchasing.

The subsequent spike in JGB yields prompted the BOJ to step up bond buying this week. It offered to take an unlimited amount of 10-year JGBs at 0.110 percent on Monday, sending a strong signal it will not tolerate the yield rising beyond that level.

But because the BOJ's policy statements have not clarified where it think yields on other maturities should be, other maturities could remain more volatile, market players say.

"I think the BOJ is still experimenting, including in assessing where the appropriate levels for the yield curve are," said Takehiro Noguchi, senior economist at Mizuho Research Institute.

"I suspect the BOJ would not mind a rise in superlong bond yields per se, but it doesn't like rapid rises," he added.

Further complicating the BOJ's work, comments from U.S. Donald Trump late last month criticising Japan's currency policy stance have raised suspicions that it may become more difficult for the BOJ to take any easing measures in the future, or even to stick to aggressive monetary stimulus.

With Japanese Prime Minister Shinzo Abe due to meet Trump later on Friday and over the weekend, market players are nervous that any signs Trump thinks the yen is too cheap against the dollar could fan speculation over the BOJ's ability to act.

The 10-year JGB futures dipped 0.07 point to 149.91. The five-year JGB yield rose 0.5 basis point to minus 0.095 percent while the two-year yield dipped 0.5 percent to minus 0.215 percent. ($1 = 113.6900 yen) (Reporting by Hideyuki Sano; Editing by Eric Meijer)

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