Oct. 31 (Bloomberg) -- Japan's five-year notes rose, completing the biggest monthly advance in more than a year, after the central bank reduced interest rates to help bolster economic growth.

Yields on the securities dropped to the lowest in six months after the Bank of Japan cut its benchmark rate to 0.3 percent, from 0.5 percent, the first reduction in seven years. Bonds also gained after Japanese stocks declined and a government report showed inflation slowed in September.

``I expect bond yields to grind lower from here,'' said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co. in Tokyo. ``The BOJ's moves certainly aren't a reason to sell bonds. This is an effective move to quantitative easing. It's also difficult to find reasons for stocks to rise, and that will help JGBs.''

The yield on the benchmark five-year note fell 3.5 basis points to 0.855 percent as of 4:23 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price of the 1.2 percent security due September 2013 rose 0.165 yen to 101.613 yen. The yield touched 0.84 percent, the lowest level since April 15.

The 10-year bond declined 2 basis points, or 0.02 percentage point, to 1.47 percent. The Nikkei 225 Stock Average slid 5 percent, extending its decline this year to 44 percent.

Ten-year bond futures for December delivery rose 0.07 to 137.98 at the 3 p.m. close on the Tokyo Stock Exchange. They fell as low as 137.07 after the rate decision was announced as the size of the cut was less than some economists expected.

Deciding Vote

Bank of Japan Governor Masaaki Shirakawa cast the deciding vote in the decision to lower the key overnight lending rate after four of the eight board members dissented. The last time the central bank lowered borrowing costs, in March 2001, it implemented a policy of so-called ``quantitative easing,'' in which it injected extra cash into the economy to fight deflation.

Speculation policy makers would lower rates was fueled by a Nikkei newspaper report Oct. 29 that said they were leaning toward a reduction. The chance the bank would halve its key rate rose to 60 percent today from 8 percent earlier this week, according to JPMorgan Chase & Co. Fifteen of 17 economists surveyed by Bloomberg News predicted a reduction to 0.25 percent.

Bonds also gained after the statistics bureau said consumer prices excluding fresh food climbed 2.3 percent in September from a year earlier, after rising 2.4 percent in August. The unemployment rate declined to 4 percent last month from 4.2 percent in August as job seekers stopped looking for work amid the economic slowdown, a separate government report showed.

Growth Forecast

The Bank of Japan slashed its growth forecast for the year ending March to 0.1 percent from 1.2 percent predicted in July, in a twice-yearly outlook published after the rate decision. The economy will expand 0.6 percent next fiscal year and 1.7 percent in the period starting April 2010, the report said.

``Today's data such as inflation was positive for bonds,'' said Hiroaki Takai, who helps oversee the equivalent of about $6.9 billion in assets as assistant general manager at Sumitomo Mitsui Asset Management Co. in Tokyo. ``Worries over an economic slowdown may resurface.''

Ten-year bond yields may decline to 1.2 percent by year-end, Takai said.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.

Last Updated: October 31, 2008 03:51 EDT