BOJ shift prompts long-term euro zone yield rise, steeper curve
* BOJ targets long-term bond yields, adds curve controls
* German yield curve near steepest in five months
* Analysts speculate ECB may follow BOJ yield targets
* Some fear end to easier monetary policy
LONDON, Sept 21 (Reuters) - Long-term euro zone bond yields rose and curves steepened after the Bank of Japan set a long-term rate target and "yield curve controls" in a move seen as a shift away from money-printing.
In Germany -- the bloc's benchmark debt market -- 30-year yields rose 4 basis points (bp) to 0.61 percent, while 10-year yields rose 2 bps 0.01 percent and two-year yields were flat at minus 0.66 percent.
The gap between two and 10-year yields was near its widest in five months at 66 bps on Wednesday.
Such yield curve steepening -- which is usually symptomatic of a broadly healthy economy and financial system -- comes as the BOJ abandoned its base money target and pledged to keep 10-year bond yields around current levels at zero.
And even though the BOJ vowed to continue buying bonds at a pace that ensures its holdings increase by 80 trillion yen ($781 billion) per year, some saw the move as sign that monetary easing was reaching its limits.
"The BOJ will really struggle to reassure anyone about disappearing policy ammunition," Societe Generale's head of fixed income and forex strategy Vincent Chaigneau said.
The economic benefit of steeper yield curves may come through the financial system, helping generate the inflation that central banks have pledged to revive.
Banks make money by borrowing short-term funds cheaply and lending at higher rates over the longer term, while steeper curves help insurance firms and pension funds meet their long-term commitments.
The BOJ also held off on deepening negative interest rates on Thursday, which effectively act as a tax on banks' cash.
Some analysts have begun to suggest that the European Central Bank may soon follow the BOJ's lead.
"Many market participants (particularly banks) are struggling due to low yields and the flatness of the yield curve. Could yield targeting thus be an option for the ECB, too? We cannot rule this out," RBC's chief European macro strategist Peter Schaffrik said.
TESTS AHEAD
Japanese 10-year bond yields rose to a six-month high near 0.01 percent, up some 7 bps on the day, but then fell back into negative territory in what traders said was a sign that investors would test the BOJ's commitment to its new target.
U.S. equivalents also rose, topping 1.70 percent, setting the precedent for the rise in euro zone yields when markets opened on Wednesday.
The steepening was evident in most euro zone markets, especially higher-rated bonds in France, the Netherlands and Austria.
Yet the rise in euro zone yields could be tempered by demand from Japanese investors, if the BOJ's policy shift pushes them away from their country's longer-maturity bonds towards Europe and the United States.
Analysts said expectations of this demand pushed 30-year yields in the euro zone sharply lower on Wednesday. (Editing by Alexander Smith)
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