The yield curve flattened after an auction of "superlong" maturities drew solid bids, with the spread between 10- and 20-year yields touching a 1-1/2 month low hit late last week.

While a failed German bond auction late last month had sparked fear that investors could start dumping Japanese bonds given Japan's indebtedness, such worries seem to have abated after last week's successful Japanese bond auction.

"If you look at fund flows, domestic banks have money to put to work as lending to the private sector is shrinking," said a trader at a Japanese bank.

December 10-year JGB futures ended flat at 142.17, but March futures, which will become the benchmark contract by Monday at the latest as trading in the December contract will end on Friday, rose 0.10 point to 141.71.

As a result, the calender spread, the gap between the two contracts, shrank sharply, suggesting some players are rolling over long positions to the March contract on expectations of a further rally in the market.

Japanese shares fell 1.4 percent, along with regional peers, after a warning from Standard and Poor's on euro zone countries' ratings sapped budding optimism on Europe's efforts to contain its debt crisis.

In cash bonds, the yield on 10-year JGBs dipped 0.5 basis point to 1.040 percent, slipping further from a four-month peak of 1.090 percent hit last week as selling in German bunds spooked JGB investors.

"Market sentiment has improved and I don't think there's fear that Japan may be the next in line to go into default," said Koji Ochiai, senior market economist at Mizuho Investors Securities.

The current 20-year bond yield dropped 0.5 basis point to 1.770 percent while the 30-year yield dipped 0.5 basis point to 1.955 percent.

The sector was helped by solid demand at the Finance Ministry's re-offering of 300 billion yen in 20- and 30-year bonds on Tuesday.

While the market will probably remain supported in the near term, many investors are likely to stay on the sidelines in the coming days as they look to whether Europe's leaders move decisively on solving the region's debt woes at a summit this week.

"Basically we don't really want to make bets on what Europe will do. It's prudent to take action after their decision (on Friday,)" said a portfolio manager at a Japanese bank.

Money market rates remain stable, with the overnight call rate flat at 0.07 percent.

The Bank of Japan's dollar funding operation, its first since the central banks cut dollar lending rate last week, drew a small amount of bids.