ORLANDO, Fla., Oct 20 (Reuters) - The yen's daily slide to new multi-decade lows against the dollar and the global bond market rout are pushing the Bank of Japan's 'yield curve control' (YCC) close to breaking point.

Were the BOJ to abandon or even modify its implicit 0.25% cap on the 10-year Japanese government bond yield, the yen's probable surge would lob a grenade into world markets already shell-shocked by a dire 2022.

The BOJ is the sole G10 monetary authority not to tighten policy this year. Its ultra-loose stance has accelerated Japanese investment flows abroad, helping to turn the yen's slump into one of historic proportions.

But if the yen's relative interest rate outlook were to shift suddenly, there is a vast pool of cash potentially waiting to come home.

Japan is the biggest creditor nation in the world. Its net international investment position, the difference between the stock of assets it holds overseas and stock of Japanese assets held by foreigners, was $3.29 trillion at the end of June.

International Monetary Fund figures show that of Japan's $9.96 trillion assets overseas, around $3.7 trillion is in equity-related investments, and some $5.7 trillion in debt instruments, including official reserves.

Even if only a fraction of that is repatriated, the positive impact on the yen could be huge - with Japanese investor repatriation historically an outsize exchange rate mover.

Given the scale of Japan's portfolio investment assets and liabilities of around $7.3 trillion, a sudden FX shock could in turn prove shocking to investors' leverage, hedging, and derivatives exposure globally.

Deutsche Bank strategist Alan Ruskin says a YCC change could have spillover effects that could last for a few weeks.

"A sudden change to yield curve targeting could have substantial effects across asset classes. Could you have a bigger than 5 yen move? Absolutely. Does that create its own knock-on financial dislocations? I'm a bit more sanguine about that," he said.

To be clear, the BOJ is doubling down on YCC and continues to buy the quantities of bonds it deems necessary to kill off the threat of deflation for good. Citing "edgy" markets, the IMF has also warned against tweaking it.

But pressure is building. In the short term, the 10-year yield is constantly popping above the 0.25% cap, while in the longer term, the end of BOJ Governor Haruhiko Kuroda's term in April is seen as a time for a possible policy change.

On Thursday the dollar rose above 150.00 yen for the first time since 1990, the BOJ threatened to intervene again to prop up the currency, and conducted emergency bond-buying operations to underpin the debt market.

DOLLAR/YEN HITS 150.00

Japan's fiscal year ends on March 31 so Japanese investors usually bring cash back in the January-March quarter to bolster their year-end books. This year was no different, and net portfolio flows worth around $160 billion were repatriated.

But Japanese demand for foreign assets has surged since. Some $120 billion was put to work in foreign stocks and bonds over the second quarter, and outflows continued into the third.

Meanwhile, Japanese retail foreign currency deposits at domestic banks rose to 26.58 trillion yen ($182 billion) at the end of August, up 8.3% since the start of the year. That was the biggest January-August increase since 2015, BOJ data shows.

Analysts at JP Morgan say this is unusual - Japanese investors tend to buy foreign currency when the yen is strong and sell when it is weak. The huge buildup of non-yen deposits is another wave of cash that could potentially lift the yen in a more favorable domestic interest rate environment.

The dollar is currently a whisker away from 150.00 yen, its highest level in 32 years. The yawning gap between U.S. and Japanese yields has provided the rocket fuel for the dollar's record 30% rally this year.

Daragh Maher, HSBC's U.S. head of FX strategy, reckons the dollar is close to a high and will fall to 140.00 yen early next year. He agrees that a YCC shift would be market-moving, but just how much would depend on what U.S. yields do just as much as JGB yields.

"The importance would be more from a signaling perspective. It would be the last hawkish pivot among G10 countries, so to that extent it would be viewed as significant," he said.

Maher notes that sudden yen-boosting repatriation flows tend to occur when U.S. yields are falling. Examples include the March 2011 earthquake and subsequent Fukushima nuclear disaster, Lehman Brothers in 2008, and the LTCM collapse and Russian crisis in late 1998.

What could force the BOJ to back down?

Permanent, domestically driven inflation might do it. Ironically, this is something the BOJ has been trying to engineer for 30 years, but that was in an environment of global disinflation.

Japan releases September inflation data on Friday, with the annual core rate expected to rise to a new eight-year high of 3.0%. That sounds tame but it was zero only a year ago, and anything over 3.4% will be the highest since 1982.

The yen awaits, as do world markets.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Related columns:

- G7 'recognizing' FX disruption is damp squib (Oct. 14)

- Central banks still U.S. bond buyers - but FX campaigns may jar (Oct. 11)

- Global contagion risks should put G7 on standby (Sept. 29)

(By Jamie McGeever in Orlando, Fla. Editing by Matthew Lewis)