March 12, 2018 / 7:28 AM / a year ago

UPDATE 1-JGBs flat; market in wait-and-watch mode as scandal roils Japan politics

* Financial markets focus on Japan political scandal flare-up

* JGB market tries to weigh potential impact of scandal

* Stocks rise despite scandal; BOJ bond-buying helps (Adds details and quotes, updates yield levels)

TOKYO, March 12 (Reuters) - Japanese government bond prices were unchanged on Monday as the market took a wait-and-watch stance after Prime Minister Shinzo Abe and finance minister Taro Aso came under increased fire over a suspected cronyism scandal.

In the latest chapter of an ongoing political scandal, documents seen by Reuters showed that references to Abe, his wife and Finance Minister Taro Aso had been removed from documents related to the sale of state-owned land to a school operator at a big discount.

Market focus was on how the suspicions of a cover-up could eventually affect Abe’s support base and his hopes of extending his stay in office for a third term.

The Bank of Japan has conducted powerful monetary easing and pinned long-term JGB yields near zero percent under “Abenomics,” a set of economy-boosting steps initiated by the prime minister.

“The JGB market is currently considering two scenarios. In the first, the scandal hits Abe, shakes Abenomics and weakens the BOJ’s monetary easing, prompting bond yields to rise,” said Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“In the second scenario, Abe emerges from the scandal with less damage. And if he survives, Abe could try to prop up his support ratings with a fresh round of monetary easing, and that would push down JGB yields.”

JGBs were pressured by stronger stock prices, but this was offset by the BOJ’s regular debt-buying operation.

The five-year and 10-year JGB yields were unchanged at minus 0.120 percent and 0.045 percent, respectively. The 30-year yield was also flat, at 0.755 percent.

The BOJ on Monday bought 710 billion yen ($6.66 billion) of five- to 40-year JGBs as part of its regular debt-purchasing scheme.

While the political scandal did shave part of the earlier gains, Japan’s Nikkei still managed to gain 1.65 percent, buoyed by Wall Street’s rally on Friday. ($1 = 106.6100 yen) (Reporting by the Tokyo markets team; Editing by Sunil Nair)

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