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BOJ to highlight merits of targeting JGB yields of up to 10 yrs - sources

TOKYO, Sept 14 The Bank of Japan will likely release next week an analysis showing that lowering government bond yields of up to 10 years has a bigger positive impact on the economy than pushing down longer-dated yields, sources familiar with its thinking said.

The analysis will be part of the BOJ's comprehensive assessment of its policies scheduled at its Sept. 20-21 rate review, where sources say it will likely shift its prime policy target to interest rates from base money.

For the full story on some options the BOJ is considering, see

The BOJ shocked markets and the government in January by adding negative rates to its massive asset-buying programme launched in 2013. Sources said it may debate next week whether to cut rates more deeply.

BOJ officials have voiced concern about the risks of Japan's flattening yield curve. But they also worry that reducing its purchases of super-long bonds without a clear reason would stoke market fears it is withdrawing monetary stimulus.

The BOJ hopes to use the analysis to show that pushing down the short end of the curve has more merits than doing so for the longer end.

That would allow it to justify steepening the yield curve by reducing purchases of super-long bonds and compensating for it with buying more shorter-term securities.

The central bank may also offer guidance on how much room there is left to push down real interest rates by comparing them with what it sees as a desirable yield curve.

The desirable curve would be consisted of Japan's "neutral interest rates" - or theoretical interest rate levels that neither overheats or cools the economy, they said.

The guidance would be different from an explicit target or cap on long-term rates, as the BOJ won't commit to keeping yields at a certain level with unlimited bond purchases.

(Reporting by Leika Kihara, Sumio Ito and Yoshifumi Takemoto; Editing by Kim Coghill)

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