* Benchmark JGB yield slips to lowest level since Aug 2016
* BOJ stands pat on policy as widely expected
* But Fed’s dovish tilt seen increasing pressure on BOJ to ease
By Shinichi Saoshiro
TOKYO, June 20 (Reuters) - Japanese government bond (JGB) prices gained on Thursday, boosted as U.S. Treasuries rallied after the Federal Reserve signalled interest rate cuts as early as next month.
The Fed’s dovish tilt in turn sharpened the focus on the Bank of Japan, which on Thursday kept its ultra-loose monetary policy unchanged amid speculation that it may follow its U.S. counterpart and ease sooner or later.
As widely expected, the BOJ maintained its short-term rate target at minus 0.1% and a pledge to guide 10-year government bond yields around zero percent.
But the central bank stressed anew that global risks were increasing as trade tensions and uncertainty over U.S. economic policies jolt financial markets, signalling that it, too, is leaning more toward ramping up - not whittling down - monetary support.
The benchmark 10-year JGB yield sank to minus 0.175%, its lowest since August 2016, while the 30-year yield dropped to 0.295%, lowest in nearly three years.
The decline in JGB yields, part of a global trend in sovereign bond markets, has posed a headache for the BOJ as lower yields crimp the profitability of financial institutions.
The central bank has in fact has been reducing the amount of longer-dated JGBs it buys from the market at regular operations to slow the decline in yields.
Yet expectations for the BOJ to ease policy has increased as the Fed, which hiked interest rates as recently as December, made an about turn this week. Nearly half of the Fed’s 17 policymakers are now showing a willingness to lower borrowing costs over the next six months.
“The JGB market is now pondering the possibility of the BOJ easing policy in July, when the Fed is expected to lower rates,” said Katsutoshi Inadome, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
“Easing by the Fed would strengthen the yen against the dollar, and the BOJ may have to respond in kind to neutralise the impact.”
The yen rose to a six-month high of 107.550 per dollar on Thursday. BOJ’s easy policy has helped prevent the yen from appreciating too much, supporting Japanese exporters and in turn the economy.
Easing options left to the BOJ include signalling long-term commitment to easing through forward guidance, reducing the lower band of its long-term yield target from the current minus 0.2% and beefing up its purchases of exchange-traded funds, said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
“Unless Governor (Haruhiko) Kuroda still has a bazooka hidden away somewhere, there are not many easing steps left for the BOJ,” Maruyama added.
Bold policy steps that BOJ Governor Kuroda implemented after he took helm of the central bank in 2013 were dubbed monetary “bazookas.”
“We’ve continued to balance the benefits and costs of our tools in guiding monetary policy, and believe we can keep doing so,” BOJ’s Kuroda said at a post-meeting news conference on Thursday.
“This is an approach we’ll take if the momentum for achieving our price target is lost and we would consider additional monetary easing steps.” (Reporting by Shinichi Saoshiro; editing by Gopakumar Warrier)