May 30, 2013 / 2:32 AM / 4 years ago

UPDATE 1-Kuroda: BOJ aims to reduce JGB volatility to lower L/T yields

* BOJ to release JGB purchase schedule later on Thursday

* Yields spike after BOJ's quantitative easing spooks dealers

* Improving U.S. economy also pushing up Japanese yields

By Stanley White

TOKYO, May 30 (Reuters) - Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank will try to reduce bond market volatility as much as possible in order to apply strong downward pressure on long-term yields.

Kuroda, speaking in the upper house financial affairs committee, said the BOJ will not tolerate increased volatility and the impact of its expanded quantitative easing will grow as it purchases more government debt.

Bond yields initially plunged after the BOJ radically expanded monetary easing last month but then spiked to a 13-month high due to signs the U.S. Federal Reserve could taper its own debt purchases.

The BOJ is now adjusting its market operations so they are more effective in lowering yields to help Japan escape 15 yars of mild deflation.

"I will not ignore bond market volatility," Kuroda told lawmakers in parliament.

"I want to reduce volatility as much as possible to place strong pressure on long-term yields and push them lower."

The 10-year cash government bond yield was down 3.5 basis points at 0.905 percent on Thursday, but still near a 13-month high of 1 percent hit on May 23 as U.S. bond yields surged after solid U.S. consumer confidence data.

In April, the BOJ launched a new quantitative and qualitative easing to nearly double the monetary base to 270 trillion yen ($2.64 trillion) by the end of 2014 in order to end two decades of stagnation and achieve 2 percent inflation in two years.

The BOJ's strategy, which Kuroda initially said would push rates down across the yield curve, rests on buying 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of newly issued government debt.

The size of the BOJ's purchases caused some investors to worry about decilning liquidity, which helped push up Japanese government bond (JGB) yields. A rise in U.S. Treasury yields compounded the problem, causing JGB yields to rise further.

Later on Thursday, the BOJ will release its debt purchase schedule for June and increase the frequency of purchases to lower volatility, according to a BOJ official.

Launching its new quantitative easing, the BOJ switched its monetary policy target from the overnight call rate to the size of the monetary base.

Kuroda said in parliament that the change does not mean that rates should swing wildly or that the BOJ thinks wild swings are acceptable.

The BOJ's debt purchases will help lower risk premiums and place downward pressure on yields, Kuroda said.

Kuroda also said that because inflation expectations are rising real interest rates are falling, but the BOJ cannot definitively say whether or not real rates are negative.

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