By Hideyuki Sano
TOKYO, June 21 (Reuters) - Japanese government bond yields fell to near three-year lows on Friday, extending their decline made after the U.S. Federal Reserve signalled rate cuts, before rising back a tad on profit-taking ahead of a weekend.
The 10-year Japanese government bond yield briefly dropped to as low as minus 0.195%, the lowest since late July 2016. In late afternoon, it rose back to minus 0.170%, flat on the day.
The yield fell earlier after Bank of Japan Governor Haruhiko Kuroda said on Thursday that he would not be too strict about his policy to guide the yield about 20 basis points above or below its zero percent target.
Buying accelerated as the BOJ did not reduce the size of JGB purchase on Friday and after the result of the operations showed many players limited their selling to the BOJ.
Although the yield retreated from the low, many market players think it is a matter of time before the market will test the minus 0.20% given rising expectations of monetary easing around the world.
"The market has gone a bit too far this week. But in the long run, investors will keep buying and the yield curve will flatten," said Yusuke Ikawa, Japan strategist at BNP Paribas.
The 20-year yield fell to as low as 0.145%, the lowest since July 2016, before stepping back to 0.195%, up 2 basis points.
The 30-year yield also hit a near three-year low of 0.275% , before rising back up 3 basis points to 0.320%.
The yield curve has flattened considerably compared to September 2016 when the BOJ adopted a "yield curve control" policy.
The 20-year yield now stood more than 20 basis points below its levels on the day the BOJ announced a plan to guide long-term bond yields levels in addition to short-term interest rates, which it keeps at negative levels.
Short-term bond yields also dipped, with the five-year yield dropping 0.5 basis point to minus 0.270% The two-year yield also shed 0.5 basis point to minus 0.240% .
Expectations are rising that the BOJ will have to slash interest rates further into negative levels if the yen strengthen further.
The overnight indexed swaps rates have dropped sharply in recent sessions, pricing in about 40% chance of a 20 basis points rate cut by the end of year. (Reporting by Hideyuki Sano; editing by Uttaresh.V)