Japan 10-year bond yield hits 1999 high as BOJ hikes; yen renews slide

By Kevin Buckland

TOKYO, Dec 19 (Reuters) - Japan's 10-year government bond yield jumped to a 26-year peak on Friday after the Bank of Japan raised interest rates to a three-decade high and signalled more policy tightening.

However, the yen quickly reversed an initial knee-jerk rise and fell as much as 0.7% to 156.71 per U.S. dollar JPY= by 0754 GMT, shortly after BOJ Governor Kazuo Ueda's post-meeting news conference ended.

The Nikkei share average .N225, which finished trading right before Ueda began speaking, ended the day up 1% at 49,507.21, led by artificial intelligence-linked stocks after U.S. peers rallied overnight following blowout forecasts from chipmaker Micron MU.O. The broader Topix .TOPX climbed 0.8% to 3,383.66.

The 10-year JGB yield extended earlier gains, rising as much as 5.5 basis points to 2.02%, its highest since August 1999, following the central bank's policy announcement. The 2% level had long served as a symbolic ceiling during Japan's decades-long battle with deflation.

In a widely expected move, the BOJ raised short-term interest rates to 0.75% from 0.5% in the first increase since January. The central bank said there was a "high chance" for a virtuous cycle of rises in wages and inflation to be sustained.

"The biggest takeaway for me so far is that the BOJ has moved significantly away from the cautious stance it took previously," said David Chao, global market strategist for Asia Pacific at Invesco.

At the same time, "the long-held belief that rate hikes would give the currency a boost has yet to materialise," he said. "The BOJ’s gradual tightening ... coupled with wide interest rate differentials and falling market volatility, could continue to keep the JPY weak."

At the press conference, Ueda took his familiar measured, cautious tone, particularly on the neutral interest rate, which neither stimulates nor hampers economic growth. Traders had been keen for comments on the neutral rate to try and judge the terminal rate for this hiking cycle.

"Our estimate on Japan's neutral rate sits on a pretty wide range. It's hard to set a pinpoint estimate," Ueda said.

"All I can say is that our future policy decision depends on the information that will become available at the time."

The two-year JGB yield JP2YTN=JBTC, which tends to be the most sensitive to monetary policy expectations, climbed as much as 3 bps to 1.095%, the highest since a record peak of 1.1% in June 2007.

The five-year yield JP5YTN=JBTC added 5.5 bps to 1.485%, a level last seen in June 2008.

At the longer end, 20-year yields JP20YTN=JBTC gained 3.5 bps to a record 2.97%. The 30-year yield JP30YTN=JBTC climbed 4 bps to 3.415%.

So-called super-long yields began their current climb in early November as market speculation intensified over the potential size and shape of a stimulus package under the new government of Prime Minister Sanae Takaichi.

Initially, signs that the administration would pressure the BOJ to hold off on rate hikes to support the economy kept shorter-term yields pinned down, but Ueda triggered the biggest bond market selling for four months in early December when he sent a strong signal for an imminent rate hike, and hinted he had Takaichi's consent.

The 10-year yield sat around 1.65% at the end of October.

Takaichi has billed her fiscal policy as "responsible" and "sustainable", but investors worry about a wave of new debt issuance.