JGBs firm on easing expectations after BOJ chief signals early departure

Shirakawa said late on Tuesday he would leave together with his two central bank deputies three weeks ahead of the end of his five-year term, clearing the way for slightly earlier implementation of aggressive monetary easing under his successor.

Pressured by the government led by Prime Minister Shinzo Abe, the central bank doubled its inflation target to 2 percent and committed to open-ended asset purchases from 2014.

The 10-year JGB yield fell 1.5 basis points to 0.775 percent after opening higher, at 0.800 percent.

The benchmark yield remained solidly in its recent range between a then-six week low of 0.720 percent hit on Jan. 25 and a three-week high of 0.805 percent touched on Monday.

"Given how the FX market and equity markets have reacted, bonds should be selling off, but they're not, as they're effectively pricing in more easing by the BOJ," said Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch.

"On Shirakawa leaving early, the market reaction should be more neutral, as it doesn't really change the landscape," he added.

The Nikkei stock average surged 3 percent, while the dollar hit a 2-1/2-year high of 93.91 yen.

The 10-year JGB futures contract ended morning trade up 0.19 point at 144.09, closing in on its 20-day moving average, now at 144.12.

The improved bond market sentiment even carried over into the superlong tenor, which in recent weeks has typically underperformed amid fears that the government's aggressive policies might eventually lead to inflation, and that fiscal stimulus might darken Japan's debt picture and prompt sovereign ratings downgrades.

Fears of a steepening yield curve led bond investor giant Pimco to shift funds away from the superlong zone into shorter-term debt, the head of its Japanese portfolio management told Reuters in an interview on Tuesday.

The 20-year bond yield shed half a basis point to 1.7980 percent, while the 30-year bond yield lost 1 basis point to 1.990 percent.

"Most of today's buying is concentrated in the 10-year zone, on BOJ easing hopes, but some investors are apparently using today as an opportunity to cover short positions in longer maturities, though activity is thin," said a fixed income fund manager at a Japanese asset management firm.

The five-year yield slipped 1.5 basis points to 0.140 percent, matching a low hit several times since last month which was its lowest recorded level since Japan started issuing 5-year notes in 2000.