By Hideyuki Sano
TOKYO, Aug 2 (Reuters) - Japanese government bonds had their worst sell-off in more than three years on Tuesday after the Bank of Japan said last week it would re-evaluate its policies, spooking investors who saw it as a tacit admission that easing could be reaching the limit of its effectiveness.
"If they could continue the current policy, then they wouldn't need to do this review thing in the first place," said Jun Fukashiro, head of fixed income investments at Sumitomo Mitsui Asset Management.
"But it's not clear how they are going to review it, creating a huge uncertainty for markets. For now investors are scaling back their excessive expectations about further cuts in interest rates," he added.
The price of 10-year JGB futures fell as much as 1.68 point on Tuesday and last stood at 151.29, down 0.95 point.
The 10-year JGB yield rose 11 basis points on day and 24.5 basis points in the past three sessions, which would be the biggest three-day rise since 2013.
The BOJ said on Friday it will conduct "a comprehensive assessment" of the economy and the central bank's policy effects at its next meeting, on top of its decision to ease policy further by increasing its purchase of exchange traded funds.
But it refrained from increasing its purchase of bonds and from cutting deposit interest rates on bank funds parked at the BOJ deeper into negative territory from the current target rate of minus 0.10 percent.
There is hardly any consensus on what the BOJ will come up with at its next policy meeting in September.
Some investors think cutting negative interest rates deeper into negative may be off the table given the burden negative rates put on banks and very bad reception from politicians who fear a backlash from savers.
Many bond investors have said for some time that the BOJ's bond buying - of 110-120 trillion yen a year - will hit a limit as there is a dwindling pool of JGBs investors eager to sell to the BOJ.
Falls in JGB prices accelerated after an auction of 10-year JGBs on Tuesday drew tepid demand.
The tail, of the gap between the average and the lowest accepted prices, was 0.27, the highest since March 2015.
(Reporting by Hideyuki Sano; Editing by Eric Meijer)