TOKYO, Aug 28 (Reuters) - Japanese government bond (JGB) prices slid on Friday on news that Prime Minister Shinzo Abe is set to resign and after the U.S. Federal Reserve articulated a new long-term approach to tolerate higher inflation.
Media reports that Abe will step down led to selling in JGBs as the market has been supported in large part by the Bank of Japan's massive bond buying, which started as a pillar or Abe's aggressive economic stimulus.
"We had fall in JGBs on worries his policy will be turned off," said Shuichi Ohsaki, chief Japan rates strategist at Bank of America.
"But I would think markets will gradually calm down next week as people come to realise that there will be no big policy changes."
JGB futures 2JGBv1 dropped as much as 0.42 point after Abe's news and ended down 0.30 point at 151.42.
The yield on the benchmark 10-year JGBs JP10YTN=JBTC rose 1.0 basis point to 0.050%, its highest level since early-July.
The market was also hit by falls in long-dated U.S. bonds after Federal Reserve Chairman Jerome Powell announced a new policy framework to promote higher inflation to spur economic recovery and job creation.
That would likely mean keeping short-term interest rates, and thus yields on shorter maturities, near zero for a longer period, while longer-dated bond yields jumped on worries about higher inflation down the road.
As the U.S. yield curve steepened, so did the Japanese curve, though to a much more limited degree thanks to the impact of the BOJ's heavy intervention over the last seven years.
The 20-year JGB yield rose 1.5 basis points to 0.430% JP20YTN=JBTC while the 30-year yield gained 2.0 basis points to 0.615% JP30YTN=JBTC.
At the shorter end, the two-year JGB yield JP2YTN=JBTC was steady at minus 0.115%.
(Reporting by Tokyo Markets Team; editing by Uttaresh.V)
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