By Masayuki Kitano and Hideyuki Sano
SINGAPORE (Reuters) - Japanese government bonds plunged on Thursday, taking yields to their highest in a year and leading a selloff in bonds globally after Federal Reserve Chairman Ben Bernanke's remarks sparked worries of a reduction in U.S. monetary stimulus.
Bernanke's comments, suggesting the Fed's massive bond purchases could be scaled back in the next few policy meetings if the economy improves further, triggered a reaction across a swathe of markets, lifting the dollar to a three-year high versus a basket of currencies and the U.S. 10-year Treasury yield to the highest in two months.
Asian shares fell and extended their losses after a survey showed that China's factory activity shrank for the first time in seven months in May, adding to concerns that a recovery in the world's second-largest economy is sputtering.
JGB prices dived as a surge in U.S. Treasury yields added to the woes of Japan's bond market, which has suffered a steep selloff after the BOJ unleashed massive monetary stimulus last month to boost inflation.
"Bernanke seems to be leaning towards reducing bond purchases, which was a bit of surprise. In addition, the Bank of Japan didn't offer any concrete steps to calm the JGBs," said Tadashi Matsukawa, head of fixed-income at Pinebridge Investments in Tokyo.
In testimony to Congress on Wednesday, Bernanke said a decision to scale back the $85 billion in bonds the Fed buys each month could be taken at one of the central bank's "next few meetings" if the economy looked set to maintain momentum.
Bernanke's comments came just after BOJ chief Haruhiko Kuroda disappointed JGB players by offering only lip service to the recent rises in JGB yields and reiterated they could naturally rise when the economy improves.
The 10-year JGB yield rose to 1.000 percent, its highest level since early April last year, and last stood at 0.955 percent up 7 basis points on the day.
The 10-year JGB yield has more than tripled from a record low of 0.315 percent hit on April 5, the day after the BOJ unveiled its unprecedented monetary expansion.
To appease nervous investors, the BOJ offered 2.0 trillion yen ($19.4 billion) cash in one-year contract, a type of market operation the BOJ has used a few times in recent weeks when it wanted to reduce volatility in JGBs market though with limited success.
The U.S. 10-year Treasury yield hit a two-month high of 2.069 percent earlier on Thursday and last stood at 2.044 percent.
In the stock market, MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> fell 1.5 percent.</.miapj0000pus>
MSCI's index extended its losses after the flash HSBC Purchasing Managers' Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October.
Japan's benchmark Nikkei share average showed some very choppy moves. The Nikkei was last up 0.2 percent on the day <.n225> after rising 2 percent earlier and hitting a 5-1/2 year high.</.n225>
"The focus today is that the yen pushed to 103 last night on the back of comments out of the U.S.," said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo.
The dollar held steady against the yen at 103.12 yen, having hit a high of 103.74 yen on Wednesday, the greenback's strongest level versus the Japanese currency since October 2008.
Highlighting its broad strength in the wake of Bernanke's comments, the dollar hit a near three-year high against a basket of currencies at 84.498 <.dxy> and touched an 11-month high versus the Australian dollar.</.dxy>
The weak HSBC flash PMI for China added to pressure on the Australian dollar, which fell to its lowest level since June 2012 at $0.9626.
"The Aussie fall was in reaction to Bernanke's testimony and it will go on for a while longer," said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney.
"I see a drop below $0.9600 but with good support at $0.9581. If the U.S. bond markets continue to sell off, then the Aussie could test 90 cents," he added.
In commodities markets, Brent crude slid 0.6 percent to $102.02 a barrel, while gold eased 0.1 percent to $1,367.81 an ounce.
(Additional reporting by Hideyuki Sano and Dominic Lau in Tokyo, Cecile Lefort in Sydney; Editing by Eric Meijer)