JGB futures plunge on slide in Treasuries, BOJ eyed

TOKYO, Aug 23 (Reuters) Japanese government bond futures plunged on Thursday due to a slide in U.S. Treasuries and caution before the Bank of Japan's monetary policy decision later in the session.

U.S. Treasuries fell on Wednesday as expectations faded for an imminent rate cut by the Federal Reserve and investor confidence returned to the stock market. The selling was in part spurred by a speech from Richmond Fed President Jeffrey Lacker, who said on Tuesday that market turmoil would only lead to lower rates if it began to have a discernible effect on the economy.

In Europe, the European Central Bank reminded markets of the policy stance agreed by its rate-setting Governing Council on Aug. 2, a move some analysts viewed as a signal that it was still likely to raise interest rates at its Sept. 6 meeting.'' Both the Fed and the ECB continued to pump money into the financial system on Wednesday to maintain liquidity in credit markets.

''The central banks are clearly saying their monetary policy and prudence policy, aimed at calming financial markets, are separate. These developments are favourable for the BOJ,'' said Masuhisa Kobayashi, chief JGB strategist at Barclays Capital.

The recent upheaval in overseas credit and money markets has pushed back expectations for a BOJ interest rate hike, with many expecting the central bank to hold rates at 0.5 percent when it ends its two-day meeting later on Thursday.

The BOJ is seen wanting to continue to normalise interest rates once financial markets stabilised, analysts said.

''The risk remains for a rate hike later this session. Markets may have bottomed out and that may make it difficult to completely rule out the rate hike scenario,'' Kobayashi said.

September 10-year futures were down 0.53 point at 135.33, after falling as low as 135.10, sharply below the 18-month high of 136.46 struck on late Tuesday.

Benchmark 10-year JGB yields rose 3.5 basis points to 1.605 percent, having fallen about 40 basis points in the past six weeks to hit an 18-month low of 1.540 percent late on Tuesday, levels last seen before the BOJ ended its super-easy monetary policy in March 2006.

The Nikkei stock average was up 2.43 percent.

The yen extended a slide against the dollar and higher-yielding currencies on Thursday as gains in U.S. equities soothed worries of further risk aversion and unwinding of carry trades, trading around 116 yen REUTERS CS BST0638