* BOJ conducts special JGB buying operation for 2nd time
* 10-year yield pulls sharply back from 1-yr high on BOJ
* BOJ seen to have signalled its commitment to yield curve
* JGB gyrations impact currencies as well, dollar/yen slips
* BOJ seen facing a delicate balancing act after Trump
(updates with more quotes at bottom)
By Shinichi Saoshiro
TOKYO, Feb 3 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
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
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
"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
Policymakers were shocked by an accusation from Trump this
week that Tokyo is using "money supply" for currency
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)