By Leika Kihara

TOKYO (Reuters). -The prospect of tighter U.S. monetary conditions continue to increase yields on Japan’s extremely long government bonds. It puts the central bank under pressure to keep its 10 year target.

After the Bank of Japan made an unusual offer on Monday to purchase unlimited amounts of Japanese 10-year government bonds (JGB), the yield fell below the implicit 0.25% limit.

Investors’ attention has been drawn to BOJ’s response to investors and to how it might continue to defend the crucial 10-year target.

WHEN WILL THE BOJ INTERVENE AGAIN?

BOJ’s main goal is to keep the 10-year JGB yield below 0.25%. This will also prevent rising borrowing costs. If yields rise faster than expected and threaten to breach the limit, the BOJ could intervene again.

WILL THE BOJ INTERVENE to CAP OTHER MATURITY YIELDS

By adjusting the yield curve, the BOJ aims at controlling the curve shape. It does this by setting short-term rates and the 10 year JGB yield. The BOJ does not establish a target for any other areas.

The BOJ won’t likely intervene in order to stop yield rises for maturities other that the 10-year, except if the moves threaten to increase the yield by more than 0.25%.

As it increases the financial institution’s profit from investments and loans, the BOJ considers the recent steepening in the yield curve a positive move.

WHAT’S NEXT?

The BOJ has the power to buy fixed-rate bonds for as long as it takes to stop rising borrowing costs if there is continued upward pressure on the yield of the 10-year bond.

A central bank can also choose to conduct an unscheduled operation for bond buying or increase the number of quarterly scheduled bonds purchases.

HOW MUCH FIREPOWER HAS THE BOJ LEFT?

The BOJ now owns almost half the outstanding JGBs, after years of buying large amounts of money to boost the economy. The BOJ’s market dominance allows it to manage yields while not increasing its buying. It is possible for the central bank to print money however large it needs to continue buying JGBs and achieve its yield goal.

WHAT CONTRAINS ARE THERE?

BOJ pursues two contradicting goals. The BOJ wants to preserve its yield limit to reduce borrowing costs. It also wants to keep yields low and not limit its efforts to revive a dormant market by its large presence.

This means that the BOJ will likely limit its market intervention. If it becomes necessary, the BOJ won’t increase its bond purchasing unless that is essential to preserve the 10-year yield below 0.25%.

Although the yen has been weakening recently, it won’t stop the BOJ acting to keep yields down. It may be forced to raise yields further, however, if further declines in the yen increase import costs or draw out public criticisms of rising living costs.