The Bank of Japan has conducted its first new fund-supplying operation to guide Japanese government bond yields lower. The 10-year bond yield temporarily dropped to 0.375 percent following the operation.

The central bank last Wednesday announced an expansion of a scheme called a fund-supplying operation against pooled collaterals. The scheme let the BOJ offer low-interest loans on collaterals deposited by financial institutions, and this time with much longer periods than before.

The BOJ aims to lower government bond yields by having financial institutions use the loans to buy Japanese government bonds. Yields can also be lowered when financial institutions engage in arbitrage trading, taking advantage of slight price differences in different markets.

On Monday, the central bank for the first time offered a five-year loan totaling about 1 trillion yen, or about 7.6 billion dollars.

Investors bought back government bonds on the fixed income market, sending the 10-year bond yield down to 0.375 percent. Yields on 5-year bonds has also declined.

But many international investors still think the Bank of Japan will be forced to change its monetary easing policy soon. One British private equity firm is set to sell Japanese government bonds on expectations that their yields will rise again.

BlueBay Asset Management Chief Investment Officer Mark Dowding says the BOJ's current easy money framework has already achieved its objective of higher inflation. He predicts the bank will end the current policy as early as March once inflation tops 4 percent.