Japan yields drift as traders seek balance between hawkish Fed, dovish BOJ

By Kevin Buckland

TOKYO, Sept 27 (Reuters) - Japanese government bond yields were mixed on Wednesday in a largely directionless session, as investors sought to balance the "higher for longer" outlook for overseas interest rates against a dovish redux at the Bank of Japan.

The benchmark 10-year JGB yield was flat at 0.74%, after earlier sinking as low as 0.73% amid pressure from a retreat in U.S. yields from more than decade highs.

Benchmark JGB futures finished 0.02 yen lower at 145.29, flipping from gains of as much as 0.13 yen earlier in the day.

The five-year yield lost 0.5 basis point (bp) to 0.285%, while the two-year was flat at 0.025%.

Superlong yields flipped from early declines, with the 20-year adding 0.5 bp to 1.46% and the 30-year up 1 bp at 1.71%.

The benchmark U.S. 10-year Treasury yield retreated to 4.3516% on Wednesday, catching its breath following a 45.5 bps climb this month to a 16-year peak at 4.566% overnight.

Contrasting with the Federal Reserve's hawkish stance at last week's policy meeting, the BOJ affirmed its position as a dovish outlier on Friday, vowing to "patiently maintain ultra-loose monetary policy."

Speculation had previously been building for a phasing out of stimulus as early as this year after BOJ Governor Kazuo Ueda seemed to take a hawkish tilt in an interview with the Yomiuri newspaper.

Two-year JGB yields rose to an eight-month high on 0.05% in mid-September, while the 10-year yield had hovered at a decade-high of 0.745% for most of the past week.

"The general trend is still for policy normalization," but "the market is already discounting something like a 30 basis-point rate hike within the year," said Naka Matsuzawa, chief Japan macro strategist at Nomura Securities.

"That's a level that I think the BOJ would think is a little overdone." (Reporting by Kevin Buckland; Editing by Rashmi Aich)