Japanese government bond (JGB) yields soared to 1 percent on Thursday, their highest level in a year, prompting the Bank of Japan to hold true to its promise of taking action to stabilize an incredibly volatile bond market.
Analysts expected the market volatility to last for a while, but added that buying by domestic pension funds and the central bank should help keep a lid on yields.
Benchmark 10-year JGB yields jumped as high as 1.002 percent as debt markets globally sold off on comments from the Federal Reserve chief overnight that fueled worries about an early unwinding of the central bank's asset-buying program.
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Yields had pulled back to 0.9 percent by late Asia trade as a slide in Tokyo stocks sent investors scurrying back to safe-haven bonds, giving the battered debt market a slight reprieve.
"Markets generally are nervous about the end of QE [quantitative easing] in the U.S. and that weighed on JGBs, but you have to remember the JGB market was already volatile and this has been exacerbated by the latest selling," said Nizam Idris, head of strategy, fixed income and currencies at Macquarie Bank in Singapore.
The BOJ said its decision to conduct a market operation, offering to buy $1.1 billion worth of one-year Japanese bonds, was in response to excessive volatility in the market.
That decision came just a day after BOJ Governor Haruhiko Kuroda promised to monitor the volatile bond market and respond with flexibility in its bond purchases and market operations.
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Idris pointed out that the central bank has conducted several operations in the past month that failed to end the wild swings in the once-quiet Japanese bond market.
Yields on benchmark bond yields have doubled since the BOJ unveiled a radical monetary stimulus program in early April amid uncertainty about what the policy means for the bond market.
"All else being equal, if the central bank has committed to buying bonds, I don't think the markets will aggressively question that. They're just going to re-price the market somewhat to reflect opportunities elsewhere," said Vishnu Varathan, market economist at Mizuho Corporate Bank.
"Institutional investors such as pension funds could probably get back into the bond market - they would probably be happy to have yields at 1 percent and that should mitigate too much upside on yields," he added.
Analysts said they were also watching Japanese banks because they are big holders of domestic bonds and could be hurt by the sharp selling in JGBs.
Japanese banking stocks were down 6-9 percent in Tokyo, in line with a broad-based sell-off in the Nikkei.
"Japanese banks sit on a huge amount of government bonds and if yields are moving up too quickly, the asset quality of the banks is coming under pressure and you've got a negative impact on the economy," Weston said.
- By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC