By Vidya Ranganathan and Carolina Mandl

SINGAPORE/NEW YORK (Reuters) -Japan, one of the world's most indebted developed economies, this week also turned into a saviour of sorts for its own bond market and globally.

When Reuters reported on Tuesday Japan's ministry of finance (MOF) may reduce issuance of super-long tenor debt, bond markets from Japan and South Korea to Britain and the United States reacted positively, pushing prices up and yields down.

That paused the weeks-long bond selloff forced by investors demanding bigger yields as they braced for increased inflation and government spending caused by U.S. President Donald Trump's trade and tax policies.

Yields on 40-year Japanese government bonds (JGBs) had hit a record high 3.675% last week and were down 40 basis points from that level. Yields on 30-year U.S. Treasuries dropped to below a key 5% figure, helping the yield curve turn less steep.

Michael Lorizio, managing director and head of U.S. rates at Manulife Investment Management, said Japan's proposal had stabilised all developed government debt.

"As deficits expand, this will be a test case for other countries, if being more flexible around how issuance is scheduled is an attractive option, or not."

Japan would be a test case for the entire world on the best way for governments to handle "signs of stress or a mismatch between supply and demand," Lorizio said.

As of Wednesday, going by the auction of 40-year JGBs, investors aren't sold on the idea. Demand at the auction was at its weakest since July. A week ago, investors eschewed a 20-year bond auction so badly it was Japan's worst auction result since 2012.

"For now, we have more orderly markets and some time for markets to catch their breath but, in the big picture, it's a band-aid," said Tom Nakamura, vice-president and head of fixed income & currencies at Canadian fund AGF Investments.

"All these things are meant to help market functioning in the short term, but do very little to alleviate concerns in the medium- to long-term because the underlying causes of those concerns haven't gone away and are not helped by increasing funding from shorter-term instruments," he said.

Nakamura said his portfolio has changed to limit exposure to long-end bonds and diversify into markets with healthier fiscal settings or more attractive yields, such as Germany, Poland and Romania.

RECOGNISING RISKS

Japan isn't alone. Britain's debt agency told Reuters in March there would be an "important shift" away from long-dated debt in the coming financial year in response to rising borrowing costs and reduced investor demand.