2013.05.2207:09:00UTC+00BOJ holds steady despite bond turmoil

The Bank of Japan kept policy steady on Wednesday despite concerns over recent volatility in bond market, saying growth is starting to pick up even as risks loomed from an uncertain global outlook.

The central bank upgraded its assessment of the economy, saying it "has started picking up," as Prime Minister Shinzo Abe's program of aggressive fiscal and monetary stimulus has boosted sentiment and a weaker yen has halted a decline in exports.

As expected, the central bank stuck with April's massive quantitative easing, in which it pledged to end 15 years of deflation by doubling its Japanese government-bond holdings in two years as it expands the supply of money at an annual pace of 60 trillion ($583 billion) to 70 trillion yen.

BOJ Governor Haruhiko Kuroda will hold a news conference from 0630 GMT with his comments expected to come out any time after 0715 GMT.

"I'm closely watching what Kuroda may have to say about recent volatility in JGBs," said Hideo Kumano, chief economist, Dai-ichi Life Research Institute and a former BOJ official.

"He has been saying that it would be natural for bond yields to rise gradually, but he may now need to warn against a sudden spike in yields, saying rapid rises are not desirable. He could also signal the need for the BOJ to become more proactive in conducting short-term market operations."

Despite the BOJ's enormous JGB purchases -- buying the equivalent of 70 percent of new government debt issuance -- bond prices have sold off recently, sending the 10-year yield to a one-year high of 0.92 percent last week as the BOJ's presence has dried up market liquidity.

"The BOJ is walking a very narrow path trying to engineer a gradual, not a sudden, rise in long-term rates backed by improvements in the economy," an official with knowledge of the central bank's thinking said before the policy board's two-day meeting.

Bond prices turned negative after the BOJ announcement on disappointment that the bank didn't address the market turbulence.

The benchmark 10-year yield was up 1.5 basis points to 0.895 percent, reversing an earlier fall to 0.865 percent in the morning session.