UPDATE 1-BOJ policymaker eyes huge debt issues, yields

(For more stories on the Japanese economy, click [ID:nECONJP])

* BOJ minutes show bond yields were discussed in May

* One board member warned of volatility from huge issuance

* BOJ unlikely to increase JGB buying soon - analyst

By Leika Kihara

TOKYO, June 19 (Reuters) - The Bank of Japan should monitor long-term interest rates as rising government bond issuance could make them more volatile, a board member said at a rate review in May, in a sign of central bank concern over the economic impact of rising yields.

Global long-term bond yields have climbed this year as investors fret about the markets' ability to absorb the waves of government debt being issued worldwide to finance stimulus measures.

The BOJ has appeared unphased by the yield rises in Japan, seeing them more as a reflection of growing market optimism over the economic outlook, with stock prices also climbing steadily.

But the minutes of the May 21-22 meeting showed that at least one board member was worried about the impact on yields from huge government debt issuances.

"Attention should be paid to market developments, including a possible rise in volatility of longer-term interest rates, given an expected increase in JGB issuance," the board member was quoted as saying in the minutes released on Friday.

At the time of the meeting, the JGB yield curve was steepening on concern about oversupply as the government laid out plans to sell a record 44 trillion yen ($460 billion) of new debt in the year to March 2010 to finance regular and stimulus spending to ease the pain of recession. [ID:nT35034]

The BOJ increased its outright JGB buying last December and again in March in part to prevent rising debt issuance from pushing up yields.

But with Japanese yield rises fairly mild and the economy showing signs of bottoming out, few analysts expect the BOJ to increase its JGB buying again any time soon.

"If the BOJ had to choose among the few options left to ease monetary conditions, increasing JGB buying could be the more likely, but I don't see it as an imminent issue now," said Kyohei Morita, chief Japan economist at Barclays Capital.

"Unless talk arises of another stimulus package, and even more bond issuance to fund it, there is little reason for the BOJ to act."

JGB yield gains have been far more modest than in the United States. The 10-year JGB yield has risen as much as 35 basis points this year, hitting an eight-month high of 1.560 percent earlier this month, while U.S. Treasury yields have jumped 200 basis points to above 4 percent. JP10YTN=JBTC US10YT=RR

The benchmark 10-year JGB yield has declined since then as investor optimism over the global economic outlook fades somewhat. It stood at 1.460 percent on Friday.

The BOJ currently buys 21.6 trillion yen of long-term bonds annually and has stressed the move is not aimed directly at pushing down bond yields.

Partly reflecting concern over bond oversupply, the spread between two- and 20-year JGB yields has been widening since last October and hit a 3-½ year high of 183 basis points on June 2.

At the May meeting, the BOJ upgraded its economic assessment and decided to accept foreign sovereign debt as collateral for its market operations.

The central bank upgraded its economic view again at a subsequent meeting in June as rises in exports and output fueled the view that the worst of the recession may be over.

It has kept interest rates on hold at 0.1 percent since December last year, when it cut them from 0.3 percent. (Editing by Hugh Lawson)