TOKYO, June 17 (Reuters) - The normally sedate Japanese

government bond (JGB) market has attracted global attention in

recent weeks as a surge in yields sounded warnings for deeply

indebted governments.

Yields on super-long JGBs touched record levels last month,

meaning higher borrowing costs for the government and creating

urgency for the Bank of Japan (BOJ) and Ministry of Finance to

steady the market.

Here's what you need to know:

WHAT DID THE BOJ CHANGE?

After extended monetary stimulus to prop up Japan's flagging

economy, the BOJ bought more than half of all JGBs and is now

trying to gracefully shrink those holdings in a process called

quantitative tightening.

Under a plan laid out last July, the BOJ has been slowing

its monthly bond purchases by around 400 billion yen steps each

quarter. So in the current quarter, the central bank is buying

4.1 trillion yen of JGBs each month, down from 4.5 trillion yen

each month from January through March.

The BOJ said on Tuesday the taper pace will slow to 200

billion yen step changes per quarter from next April.

HOW DID WE GET HERE?

Japan has about 1.3 quadrillion yen ($9.07 trillion) in

outstanding debt securities, the world's second-biggest amount

after the $28.2 trillion U.S. Treasuries market.

Persistent fiscal deficits have caused Japan's ratio of debt

to gross domestic product (GDP) to expand to about 250%, the

highest in the developed world. Prime Minister Shigeru Ishiba

said last month the nation's fiscal situation was worse than

Greece's.

But unlike Greece, whose debt-to-GDP ratio was around 150%

when the nation was bailed out in 2010, about 90% of Japan's

debt is held domestically. That makes the JGB market less

vulnerable to investors who punish profligate governments by

selling their debt, so-called bond vigilantes.

WHAT TRIGGERED THE JGB SELL-OFF?

Long-dated bonds have sold off around the world in recent

weeks as investors grew wary about widening fiscal deficits and

debt piles among major issuers, concerns encapsulated by Moody's

downgrade of the United States on May 17.

But Japan has some unique issues. Lawmakers are mulling cash

handouts and other stimulus to woo voters ahead of an upper

house election slated for July. Also, demand has fallen off for

super-long bonds among traditional buyers.

Japan's life insurers, for example, have steadily bought the

securities over recent years to comply with new solvency

regulations. With that buying mostly complete, insurers are now

shifting into higher-yielding debt.

A 20-year JGB auction last month laid bare the precarious

situation. Demand was the weakest since 1987, as indicated by

the auction's tail - the difference between the lowest and

average accepted prices.

That triggered a long-term debt sell-off that sent 40-year

yields to a record high 3.675%, 30-year rates to an all-time

peak of 3.185%, and 20-year yields to 2.595%, the highest since

October 2020.

Subsequent sales of 30- and 40-year securities also saw weak

demand, sparking concerns of a runaway increase in borrowing

costs.

WHAT WAS THE RESPONSE?

The rapid run-up in JGB yields spooked policymakers. In

years past, Japan's central bank has come to the rescue in

volatile markets by buying bonds and stocks.

However, under Governor Kazuo Ueda, the BOJ has committed to

shrinking its balance sheet, leaving the finance ministry to

take the lead in calming markets.

Finance Minister Katsunobu Kato warned that higher rates

could further imperil Japan's finances and pledged "appropriate"

debt management. The government issued rare warnings about

rising yields in its economic roadmap last Friday.

Ueda acknowledged views that demand for super-long bonds had

declined and that volatility in those yields could impact

shorter rates, which have a more direct economic impact.

The finance ministry is now planning on trimming issuance of

20-, 30-, and 40-year bonds, balancing those reductions with

increases of shorter-term notes, Reuters has reported. The

ministry is also considering buying back some super-long JGBs.

The rise in yields means JGBs are increasingly attractive

for overseas investors, especially those looking to decrease

dollar exposure. But foreign holders are more likely to dip in

and out of the market, creating volatility.

Kato has in recent days talked up the importance of domestic

ownership of national debt and proposed a new type of

floating-rate note and allowing unlisted companies to buy bonds

designed for individual investors.

WHAT'S NEXT?

The finance ministry will meet market participants later

this month, which will inform its decisions on bond issuance and

buyback changes.

An auction of 20-year JGBs on June 24 will be the next key

test of demand for super-long bonds.