Bank of Japan refrains from warning against yield rise to 12-year high

* Long-term yields to be set by markets, says BOJ Ueda

* Ueda says BOJ will closely monitor market developments

* Remarks come in wake of rise in long-term rates to 12-year high

STRESA, Italy, May 25 (Reuters) - The Bank of Japan's basic stance is for long-term interest rates to be set by markets, Governor Kazuo Ueda said on Saturday, offering no strong concern over a recent rise in the benchmark 10-year government bond yield to a 12-year high.

The remark suggest the central bank likely won't ramp up bond buying to push down yields, and will scrutinise market moves to determine how soon it can start slowing purchases.

The central bank has said it will continue to buy government bonds at a pace of roughly 6 trillion yen ($38 billion) per month, but slow purchases at some point in the future.

"Our basic stance is for long-term interest rates to be set by markets," Ueda told a news conference after attending a gathering of the Group of Seven (G7) finance leaders in Italy, when asked about recent rises in Japan's long-term rates.

"We will closely watch market developments," he said.

The BOJ ended eight years of negative interest rates and other remnants of its radical monetary stimulus in March, including a policy that caps the 10-year bond yield around 0%.

But it pledged to keep buying bonds at the current pace for the time being to avoid the policy shift from causing an abrupt spike in bond yields, and hurt a fragile economic recovery.

Having taken the first step toward policy normalisation in March, Ueda has signaled the BOJ's readiness to keep raising interest rates and eventually slow its bond buying.

The BOJ also caught traders off guard with an unscheduled reduction in bond buying on May 13, a move markets took as a prelude to a full-fledged tapering of its bond purchases.

The hawkish signals have pushed up long-term interest rates with the benchmark 10-year bond yield hitting a 12-year high of 1.005% on Friday, exceeding the 1% mark that the BOJ used to defend with huge bond purchases until the March policy shift.

A

Reuters poll

showed nearly two-thirds of economists expecting the BOJ to start tapering the size of its bond buying by end-July.

Markets are also focusing on any clues on when the BOJ could raise short-term interest rates from current near-zero levels.

Ueda said on Thursday Japan's economy was on track for a moderate recovery, suggesting a slump in first-quarter gross domestic product (GDP) alone would not keep the central bank from raising interest rates in coming months.

Ueda and Japanese Finance Minister Shunichi Suzuki visited the northern Italian city of Stresa to attend the two-day G7 finance leaders gathering that ended on Saturday. ($1 = 156.9900 yen) (Reporting by Leika Kihara Editing by Gareth Jones and Frances Kerry)