TOKYO Aug 22 Japanese government bonds fell on Thursday, tracking a drop in U.S. Treasuries after minutes of the Federal Reserve's July meeting suggested the U.S. central bank could reduce its asset-buying stimulus as early as next month.
* The U.S. 10-year Treasury yield rose as high as 2.919 percent in Asia on Thursday, which was its highest level since July 2011.
U.S. yields extended their rise in Asia after the Flash HSBC Purchasing Managers' Index showed activity in China's vast manufacturing sector hit a four-month high in August as new orders rebounded.
* Weekly capital flow data from the Ministry of Finance showed that Japanese investors turned net sellers of foreign bonds after six weeks of net buying.
* "There are Japanese investors who are interested in buying Treasuries, but with the Fed getting ready to taper, they know they can buy at better levels if they wait a while," said a fixed-income fund manager at a Japanese asset management firm.
"In the meantime, investors are putting funds in JGBs, and this is providing some support to the market here," he added.
* Another reason the move in JGB yields was more muted than the drop in Treasuries was the fact that the Bank of Japan's monetary policy diverges sharply from the Fed's, and is providing support to the domestic bond market. The BOJ has pledged to maintain its ultra-easy policy to help pull Japan out of deflation and stoke inflation of two percent within two years.
* A Reuters survey on Thursday showed the BOJ's easy policy and government's reflationary stance are having an effect on business sentiment.
Japanese manufacturers' optimism improved to the highest level in three years, the Reuters tankan poll showed, as a weak yen boosted earnings for exporters of textiles, chemicals, steel and other metals.
* The yield on the benchmark 10-year JGB added 1.5 basis points to 0.745 percent, pulling away from Wednesday's low of 0.720 percent, which was its lowest since May 10.
* Ten-year JGB futures ended morning trade down 0.13 point at 143.99, moving away from Wednesday's one-week intraday high of 144.23.
* The superlong sector also skidded, with the yield on the 30-year JGB adding 1 basis point to 1.810 percent, while the 20-year yield rose 2 basis points to 1.695 percent.