BOJ vows to keep tapering bond buying despite rise in yields

By Kantaro Komiya and Leika Kihara

(Reuters) -The Bank of Japan will keep tapering its government bond purchases despite recent rises in yields, deputy governor Shinichi Uchida said on Friday, stressing its huge bond holdings continue to exert a strong stimulus effect on the economy.

Uchida also reiterated the central bank's readiness to continue raising short-term interest rates if economic and price developments move in line with its projections.

"Japan's economy is recovering moderately, albeit with some weaknesses," Uchida told parliament, adding that underlying inflation was gradually accelerating toward the BOJ's 2% target.

The remarks follow those by governor Kazuo Ueda, who warned of "very strong" uncertainty over the global economic outlook due in part to threats of higher tariffs by U.S. President Donald Trump.

The BOJ raised short-term interest rates to 0.5% from 0.25% in January, and continues to taper its huge bond buying under a plan laid out in July last year.

Japanese government bond (JGB) yields have risen recently on mounting market expectations the BOJ will raise rates again soon and may take borrowing costs higher than initially thought.

"There's no change to our stance on short-term policy rates and government bond operations" despite the recent rise in yields, Uchida said.

"The move in yields reflects the market's view on the economic and price outlook, as well as overseas developments," he said, adding the BOJ's huge bond holdings "continue to exert a strong monetary easing effect" on the economy.

When asked by an opposition lawmaker whether the BOJ's taper plans and prospects of further rate hikes would keep pushing up bond yields, Uchida said: "That's up to markets to decide."

After rising on Thursday due to revived bets of a near-term rate hike, the 10-year JGB yield fell 1.5 basis points (bps) from the previous day to stand at 1.375% on Friday.

A majority of economists polled by Reuters expect the BOJ to hike rates once more this year, most likely during the third quarter, to 0.75%. The BOJ will next hold its policy review on March 18-19.

(Reporting by Kantaro Komiya in Tokyo and Leika Kihara in Cape Town; Additional reporting by Takahiko Wada in Tokyo; Editing by Chang-Ran Kim and Shri Navaratnam)