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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, arresting an earlier surge in yields.
The benchmark 10-year yield was up half a basis point at 0.110 percent after climbing to 0.150 percent, its highest since late January 2016.
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.
The central bank, however, later 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.
"For now, the 10-year yield appears to be capped at current levels after the buying operation showed where the ceiling was," said Soichi Takeyama, fixed-income strategist at SMBC Nikko Securities.
"But on the other hand, yields are unlikely to fall much further from here because of the recent spike in volatility, caused by events like yesterday's weak 10-year auction. Volatility has sapped investors' strength and it could take a while before they regain their footing."
The central bank maintained a pledge to guide the 10-year JGB yield at around zero percent after its policy meeting on Tuesday, but the financial markets have 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 gravitational pull on yields following Friday's special buying operation by the BOJ was not felt as strongly in the superlong JGB maturities.
The 20-year yield was up 2 basis points at 0.705 percent after declining briefly to 0.685 percent after the BOJ's special buying operation from a one-year high of 0.730 percent.
The BOJ has not explicitly explained that its "yield curve control" scheme, rolled out in September to keep the 10-year yield around zero percent, stretches out through the superlong maturities.
The rise in superlong yields have been more pronounced as result and has led to a significant steepening of the curve, with the 10-year/30-year yield spread at its widest since March 2016. (Additional reporting by Lisa Twaronite in Tokyo)