By Leika Kihara
TOKYO (Reuters) - The Bank of Japan stands ready to ramp up government bond buying if long-term interest rates rise sharply, Governor Kazuo Ueda said on Friday after recent increases in yields to their highest in about 15 years.
Ueda said the BOJ's basic stance was to allow market forces to determine long-term interest rate levels, saying he would not comment on where yields would eventually converge.
He also said recent yield rises in principle reflected a modest economic recovery and a rising price trend.
"We expect long-term interest rates to fluctuate to some extent," reflecting changing market views on Japan's economic and price outlook, Ueda told parliament when asked by an opposition lawmaker about recent rises in bond yields.
"But when markets make abnormal moves and lead to a sharp rise in yields, we are ready to respond nimbly to stabilise markets," such as by increasing bond purchases, he said.
Ueda's remarks helped push down the 10-year Japanese government bond yield (JGB) to 1.42% from 1.455% earlier in the day, its highest since November 2009.
The yen also retreated from a 2-1/2-month high, helping Japan's Nikkei share average reverse losses.
JGB yields have risen steadily as investors price in the chance that the BOJ could raise interest rates, currently at 0.5%, more aggressively than expected.
Ueda said the BOJ could raise its short-term policy rate further "if the inflation outlook continues to improve," adding that underlying inflation was still below its 2% target.
When raising interest rates further, the BOJ will be mindful of any unpredictable effects higher rates could have on the economy, he said.
The BOJ ended a decade-long massive stimulus last year, including a policy capping 10-year yields around zero through aggressive bond purchases, on the view that Japan was on the cusp of durably achieving its inflation target of 2%.
The central bank also began tapering its huge bond buying under a plan laid out in July to halve monthly purchases to 3 trillion yen ($20 billion) by March 2026. In the plan, the bank said it stood ready to ramp up bond buying in exceptional cases to deal with any abrupt rises in yields.
Ueda said he could not say in advance when the BOJ would conduct emergency bond market operations, saying only the central bank would watch the market carefully for any emerging signs of destabilisation.
($1 = 150.2700 yen)