Nov. 17 (Bloomberg) -- Japan's bond futures rose for a third day after a government report showed that the world's second-largest economy is in its first recession since 2001.

Gross domestic product fell an annualized 0.4 percent in the three months ended Sept. 30, after sliding at a 3.7 percent rate in the previous quarter, the Cabinet Office said today in Tokyo. Economists estimated growth of 0.1 percent. The Bank of Japan today will start to pay interest on reserves deposited by lenders at the central bank as part of an effort to increase liquidity in the financial system.

``If GDP is much weaker than expected, it'll be positive for bonds,'' said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., a Japanese unit of the second-biggest U.S. bank by assets. ``The attention is on whether repo rates will decline as the BOJ starts to pay interest on reserves.''

Ten-year bond futures for December delivery advanced 0.34 to 138.71 as of 9:03 a.m. at the Tokyo Stock Exchange.

The benchmark 10-year bond hasn't traded yet today at Japan Bond Trading Co., the nation's largest interdealer debt broker. The yield on the 1.5 percent bond due in September 2018 gained 2 basis points to 1.5 percent on Nov. 14. A basis point is 0.01 percentage point.

The BOJ last month said it will start paying 0.1 percent interest on reserves, encouraging finance companies to lend excess cash to the central bank. The Bank of Japan will provide extra funds for institutions that need money. The interest payments will also stop the overnight lending rate falling below 0.1 percent, allowing for the increased provisions of liquidity.

Policy Response

Japan's overnight call loan rate was at 0.305 percent in Tokyo today, from 0.28 percent on Nov. 14, according to broker Tokyo Tanshi Co. The BOJ's target rate is 0.30 percent.

Leaders from the biggest developed and emerging nations agreed to further steps to shore up a global economy sliding into recession, and laid out regulatory proposals to prevent a recurrence of the financial crisis.

The Group of 20 on Nov. 15 urged a ``broader policy response,'' citing the potential for additional interest-rate cuts and fiscal stimulus, in a statement after meeting in Washington.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

Last Updated: November 16, 2008 19:12 EST