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Japan’s Bonds Fall, Complete 2nd Weekly Drop, on Rising Stocks

March 12 (Bloomberg) — Japan’s 10-year bonds fell, completing a second weekly decline, as Asian stocks joined a rally in global equities, damping demand for the safety of debt.

Benchmark yields also climbed to the highest in more than a week after public broadcaster NHK said Japan’s government will raise its economic assessment for the first time in eight months. Declines in bonds were limited after Bank of Japan Governor Masaaki Shirakawa told lawmakers in Tokyo today the central bank will keep interest rates low.

“The stronger Nikkei 225 Stock Average on the back of firm U.S. stocks weighs on the market,” said Shuji Tonouchi, a senior bond strategist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets.

The yield on the 1.4 percent bond due March 2020 rose two basis points, or 0.02 percentage point, to 1.34 percent as of 3:24 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.178 yen to 100.528 yen. Yields added 3.5 basis points this week.

Ten-year bond futures for June delivery dropped 0.30 to 138.85 as of the afternoon close at the Tokyo Stock Exchange. The contracts fell 0.47 this week.

The Nikkei 225 gained 0.8 percent today after the Standard & Poor’s 500 Index reached the highest since October 2008

Japan’s 10-year yields had a correlation of 0.72 with the Nikkei 225 over the past week, compared with a relationship of 0.45 last month, according to Bloomberg data. A value of 1 would mean the two moved in lockstep.

Improving Economy

Finance Minister Naoto Kan said today a revised gross domestic product report yesterday showed the economy is improving. Gross domestic product expanded at an annual 3.8 percent rate last quarter, the Cabinet Office said yesterday. While that was lower than the 4.6 percent reported initially, it was better than the economy’s performance in the third quarter, when it shrank at a 0.6 percent pace.

The data showed that “overall, the economy has taken a step forward, although I can’t say we’re in a self-sustained recovery,” Kan said at a press conference in Tokyo today.

The Japanese government will say next week the economy is showing stronger signs of recovery as corporate earnings and personal consumption improve, NHK said, citing an unidentified person familiar with the plan.

BOJ Policy

Bond declines were tempered on speculation the Bank of Japan will expand liquidity in markets. The central bank’s options include expanding a 10 trillion yen ($111 billion) fund providing loans to banks, according to two central bank officials who spoke on condition of anonymity.

“If we can confirm that the BOJ is moving toward easing policy, it will be a plus for the bond market,” said Kenro Kawano, a debt strategist at Credit Suisse Group AG in Tokyo.

The central bank has kept the key overnight lending at 0.1 percent since December 2008, and is purchasing 1.8 trillion yen of government bonds each month. It has lent 9.6 trillion yen under the three-month bank loan program that was introduced in December, close to the current limit.

In the unlimited lending facility set to expire this month, there was 5.9 trillion yen outstanding as of Feb. 28. Both facilities offer three-month credit at 0.1 percent.

Japanese Deputy Finance Minister Yoshihiko Noda said yesterday that the Bank of Japan understands the risk falling prices pose to the nation’s economy.

Investors expect consumer prices to drop an average 1.1 percent per year over the next five years, according to Japanese breakeven rates, or the yield differential between conventional and inflation-protected securities.

The costs companies pay for energy and unfinished goods declined 1.5 percent in February from a year earlier, after sliding 2.1 percent in January, the BOJ said on March 10.

Deflation, or a general drop in prices, enhances the value of the fixed interest of debt.
[BusinessWeek]

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