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BOJ surprises JGB market by increasing buying, bond yields fall

By Hideyuki Sano

TOKYO, Jan 27 (Reuters) - The Bank of Japan surprised the government bond market on Friday by increasing its buying in five- to 10-year bonds, helping to bring down their yields from 11-month highs touched earlier this week.

The move came only two days after the central bank also caught markets by surprise when it abruptly skipped a widely anticipated buying in shorter maturities and sent their yields soaring.

The 10-year JGB yield dropped 1.5 basis points to 0.070 percent. On Thursday it had risen to 0.090 percent, its second highest peak after 0.100 percent touched in mid-December since the BOJ introduced its "yield curve control" to guide the 10-year yield around zero percent.

"(After Wednesday), there was an impression that the BOJ wasn't trying to bring down bond yields. But I suspect the BOJ could not stay silent if the 10-year yield was to go above 0.1 percent," said Hideaki Chida, chief fixed income strategist at NLI Research Institute.

The fall in JGB yields helped to push down the yen about 0.3 percent against the dollar to 114.82 yen per dollar.

Yields on other maturities have fallen in tandem, with the 20-year yield falling 1.5 basis points to 0.640 percent retreating further from Thursday's 0.660 percent.

The five-year yield fell 0.5 basis point to minus 0.100 percent from a one-month high of minus 0.085 percent.

The BOJ said on Friday it would buy 450 billion yen ($3.92 billion) of JGBs with maturity of more than five to ten years. In recent months, it had been buying 410 billion yen of them each time and six times per month.

Still, Friday's increase in buying - of 40 billion yen - hardly makes up for the impact of skipping its purchase of 820 billion yen in one- to five-year bonds that market players had been expecting on Wednesday.

The BOJ's total bond buying in January looks set to be around 8.2 trillion yen, the lowest since October 2014, and more than 10 percent below the average of 9.4 trillion yen it bought to maintain its previous policy target to increase its bond holdings by 80 trillion yen a year.

Although the BOJ has said it would keep that pace of JGB purchase even under its yield curve control policy, many market players expect the BOJ to gradually reduce buying as its aggressive buying looks increasingly unsustainable.

The BOJ introduced a new policy target of "around zero percent" in the 10-year yield, in September, ditching its asset purchase target of increasing its bond holdings by 80 trillion yen a year.

($1 = 114.89 yen) (Editing by Jacqueline Wong)