Japan bonds edge lower as traders gauge extent of Takaichi fiscal stimulus

By Rocky Swift

TOKYO, Oct 8 (Reuters) - Japanese government bonds (JGB) traded lower on Wednesday, following a tumultuous session in which yields surged to historic levels before reversing direction, as speculation swirled about the course of the nation's fiscal policy.

The 10-year JGB yield JP10YTN=JBTC rose 1.5 basis points (bps) to 1.690%.

On Tuesday, the yield touched 1.695% for the first time since July 2008 before finishing lower on the day. Yields move inversely to bond prices.

The 30-year JGB yield JP30YTN=JBTC, which reached an all-time high of 3.345% in the previous session, was flat at 3.17%.

The JGB market has been on edge since the election of fiscal dove Sanae Takaichi to lead the ruling Liberal Democratic Party, positioning her to replace hawkish Shigeru Ishiba as prime minister.

Takaichi is a devotee of the "Abenomics" policies of the late Shinzo Abe, who oversaw huge expansions of fiscal and monetary stimulus. Attention is now focused on which parties Takaichi will court into a coalition with the LDP and who she will appoint to key roles, such as the minister of finance.

"Market participants have understandably been waiting for insights into the intended direction of fiscal policy," Mizuho Securities senior market economist Yusuke Matsuo wrote in a note.

"We believe that Takaichi will ultimately need to take a pragmatic approach to her 'responsible proactive fiscal policy' strategy owing to the people she will be surrounded by as well as the various pressures she will be facing from markets," Matsuo added.

A smooth auction of 30-year bonds on Tuesday helped soothe concerns that the market would avoid super-long debt with a fiscal expansionist at the government helm.

The 20-year JGB yield JP20YTN=JBTC added 1 bp to 2.695%. The five-year yield JP5YTN=JBTC climbed 2.5 bps to 1.23%. The two-year yield JP2YTN=JBTC rose 2 bps to 0.925%.