Members of a ruling Democratic Party panel were meeting to discuss raising the sales tax, with the government having set itself a year-end deadline to flesh out a plan originally floated in June to reform welfare spending.
But market participants were watching to see if a proposal to eventually double the 5 percent sales tax to pay for rising welfare costs would be approved.
When the panel took a lunch break members told Reuters there was a lack of consensus on the timing of sales tax increases and pledges on welfare.
Many market players said it will be hard for investors to adjust their positions as long as the outlook for the tax is unclear. Investors including regional and big banks were said to be selling small lots of long-dated bonds on concerns that the government may be unable to come up with a tax hike or any other credible plan to slim down public debt, said a trader at a Japanese brokerage firm.
March 10-year JGB futures slipped 0.10 point to 142.19, erasing early gains after data showed Japanese industrial output is expected to rise 4.8 percent in December and 3.4 percent in January after posting a bigger-than-expected fall of 2.6 percent in November.
"Although the November figures show a slowdown in production, the appetite for JGBs has been dented by signs of a bright outlook (for the wider economy)," said a fund manager at a Japanese asset management firm.
The 10-year cash bond yield edged up 1 basis point to 0.990 percent, the highest since Dec. 15, but keeping near a three-week low of 0.965 percent hit last week. The 20-year yield climbed 1.5 basis points to 1.755 percent, the highest in nearly two weeks.
A disappointing German bond auction late last month sparked fears that investors could start dumping Japanese bonds, given Japan's own fiscal woes. But such worries seem to have abated and yields have come back down to around where they were before the German sale .
Some market players expect low volume could exaggerate market moves and lead to volatility, though many see yields staying rangebound as most investors have finished adjusting their positions ahead of the New Year holiday.
"Although the Christmas holiday is over it's unlikely that foreign players will resume working so soon as most of them take breaks for a few weeks," said Keiko Onogi, a senior JGB strategist at Daiwa Securities Capital Markets. She added that JGBs were unlikely to show any clear direction until after the new year holidays.