TOKYO, July 10 (Reuters) - Japanese government bonds came under renewed pressure on Monday, with the five-year yield hitting its highest level in nearly 1-1/2-years, stoking speculation the Bank of Japan could yet again be drawn into the market to curb rises in short-term debt yields.
Investors are nervous that rising global bond yields could ripple across the entire JGB market, pitting the BOJ against market forces it has little control over even as the central bank showed its determination last week to defend its commitment to keep the 10-year yield around zero percent.
Market players are watching to see how the BOJ will respond to rises in five-year JGB yields, lest it again puts pressure across the 10-year paper and longer-end of the curve.
The two key events for investors are a five-year JGB auction planned on Tuesday and the BOJ's planned buying operation of short-term bonds on Wednesday, though the central bank could conduct a special operation on any day if it deems it necessary.
"Tomorrow's auction and Wednesday's BOJ operation are holding the key. If the BOJ doesn't try to keep a tab on the five-year yield, then the dike will collapse and there will be spill-over to the 10-year yield," said Tohru Yamamoto, chief strategist at Daiwa Securities.
The five-year JGB yield rose 1.0 basis point to minus 0.035 percent, going above its November high of minus 0.040 percent and hitting its highest level since Jan. 29 last year, when the BOJ unexpectedly unveiled negative interest rates policy.
JGB yields have climbed in recent weeks in tandem with rising global yields on expectations that major central banks, including the European Central Bank, may withdraw their stimulus in the not-too-distant future.
On top of this, some market players also said investors are starting to worry whether Bank of Japan Governor Haruhiko Kuroda will retain his post or not after his current term expires in April.
The benchmark 10-year JGB yield rose 0.5 basis point to 0.090 percent, though it kept some distance from Friday's five-month high of 0.105 percent.
The yield dropped on Friday after the BOJ showed its determination to keep it from rising further by announcing a plan of unlimited purchases at 0.110 percent and an increase in its regular buying in that maturity through an auction.
Those operations on Friday assured market players of the central bank's commitment to keep the 10-year yield "around zero percent" as spelled out in its policy statement - a pledge that is being severely tested amid the rise in global yields.
But investors were less sure about the BOJ's intention on shorter maturities, on which it does not have explicit policy targets.
Last November the BOJ did a special fixed-rate operation, offering to buy five-year bonds at yield of minus 0.04 percent, but so far it has refrained from taking similar steps even as the five-year yield rose above that level on Monday.
Short-term bond yields have been rising in the past few months partly because the BOJ has reduced buying in those maturities. (Reporting by Hideyuki Sano; Editing by Shri Navaratnam)