(Refiles to fix word in first paragraph)
* JGBs plunge for 3 days in row since BOJ surprise on Friday
* Investors sense limit of easing after pledge to review policy
* Shorter maturities badly hit as rate cuts priced out
* Some see chance of effective tapering in new framework
By Hideyuki Sano
TOKYO, Aug 2 (Reuters) - Japanese government bonds saw their worst sell-off in more than three years on Tuesday as investors feared the Bank of Japan may ratchet back the pace of its aggressive government bond buying.
The BOJ disappointed markets on Friday by keeping bond purchases steady, defying expectations it would hoover up more, and made traders even more nervous after announcing it would re-evaluate its policies in September.
Some investors see the policy review as a tacit admission by the central bank that more than three years of monetary 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.
Japanese bond yields have steadily retreated since the BOJ stunned markets and the government in January by moving to negative interest rates. But they have pulled off record lows in recent sessions on growing worries that the BOJ may be out of ammunition and less inclined to more radical action.
The price of 10-year JGB futures closed down 0.91 point to 151.33, having fallen 2.47 points in the last three sessions, the biggest three-day fall since May 2013.
The 10-year JGB yield hit a 4-1/2-month high of minus 0.025 percent and last stood at minus 0.060 percent, up 8.0 basis points (bps) on the day. The 15-year yield turned positive on Friday for the first time in a month.
The BOJ said it will conduct "a comprehensive assessment" of the economy and the central bank's policy effects at its next meeting in September, on top of its decision to ease policy further by increasing its purchase of exchange traded funds.
But it refrained from increasing its existing bond purchases 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, as some traders had expected.
"Initially the market took the BOJ's review as a pledge to do more easing. But then on second thoughts, it dawned on market players that if the BOJ had been confident about the effects of those steps, it could have done so already," said a senior trader at a proprietary trading desk at a major Japanese bank.