Nov. 12 (Bloomberg) -- Japanese and U.S. government bonds rose after central bank officials signaled inflation doesn’t pose a threat and Japan reported a 10th month of declines in producer prices. Asian stocks fell, reversing earlier gains.

Japan’s benchmark 10-year bond yield declined 5.6 basis points to 1.37 percent. The rate on U.S. Treasuries of similar maturity fell 6.7 basis points to 3.42 percent after Federal Reserve officials indicated near-zero interest rates will be maintained. Bonds also rose as China’s Premier Wen Jiabao said the world faces a “slow and bumpy” recovery.

Gold advanced for a ninth day to a record $1,123.40 as the dollar weakened and investor Marc Faber said the price won’t fall below $1,000 again. The MSCI Asia Pacific Index slipped 0.4 percent to 118.39, set to end a four-day rally of 3.6 percent.

“Prolonged deflation means that the Bank of Japan can’t possibly start hiking interest rates anytime soon,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd. “This will give financial institutions with excess cash the confidence to buy government debt.”

South Korea’s central bank left interest rates on hold for a ninth month at 2 percent today to underpin growth. Bank of England Governor Mervyn King said yesterday he has an “open mind” on further bond purchases, a signal officials aren’t ready to withdraw stimulus yet.

The Fed cut its target for overnight loans to a range of zero to 0.25 percent in December and reiterated a pledge to keep borrowing costs at a record low for an “extended period” last week. U.S. consumer prices rose 0.2 percent in September from the previous month, a second month of slowing inflation.

‘Home-Made’ Deflation

Costs Japanese companies pay for energy and unfinished goods tumbled 6.7 percent in October from a year earlier, the Bank of Japan said today.

The central bank last month forecast that both wholesale and consumer prices will continue to fall through the year ending March 2012, which would mark the third year of declines.

Japan’s producer prices “have moved into a new phase of ‘home-made’ deflation linked to a lack of domestic demand,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “Deflation may become less speedy but could also become more sticky.”

Most Asian stocks fell as losses in Japanese drugmakers countered advances among mining companies and automakers.

Hisamitsu Pharmaceutical Co. and Tsumura & Co. sank at least 7 percent in Tokyo after a government committee advised cutting drug prices to trim medical expenses. Honda Motor Co., Japan’s second-biggest carmaker, jumped 1.8 percent after Goldman Sachs Group Inc. recommended buying the stock.

Recovery Concerns

Japan’s Nikkei 225 Stock Average fell 0.7 percent to 9,804.49 in Tokyo. Australia’s S&P/ASX 200 Index dropped 0.2 percent even as the government posted an unexpected increase in jobs last month. The Kospi Index sank 1.4 percent in South Korea. Futures on the Standard & Poor’s 500 Index lost 0.4 percent.

“Concerns about whether the recovery is sustainable or not are weighing on shares,” said Hiroshi Morikawa, a senior strategist in Tokyo at MU Investments Co., which manages the equivalent of $14 billion.

China’s Shanghai Composite Index lost 0.1 percent, while the Hang Seng Index in Hong Kong fell 1 percent. The Hang Seng earlier rallied to a level 100 percent above its low this year on March 9.

‘Slow and Bumpy’

“The global economy is starting to recover but a total recovery will be a slow and bumpy process,” Chinese Premier Wen Jiabao said today. China will “continue opening up, cooperating and shouldering its responsibilities” to help restore stable global growth, he said.

China’s economic growth in the second half of this year will exceed 9 percent, Yu Bin, director of the macroeconomic research department of the State Council’s Development Research Center, said today.

Gold futures rose as much as 0.8 percent to $1,123.40 to a record and a ninth straight advance. On an inflation-adjusted basis using the U.S. Labor Department’s calculator, gold needs to rise above $2,287 to exceed its 1980 peak.

“We will not see less than the $1,000 level again,” Marc Faber said at a conference in London. “Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.”

Newcrest Mining Ltd., Australia’s biggest gold mining company, rose 0.7 percent to A$35.58. Zijin Mining Group Co., China’s largest gold producer, added 0.1 percent to 9.73 yuan. Rio Tinto Group, the world’s No. 3 mining company, climbed 1.8 to A$69.84 percent in Sydney.

‘Market-Oriented’ Currencies

The Dollar Index, which measures the greenback against a basket of six currencies, was little-changed and earlier fell to the lowest since Aug. 7, 2008. U.S. Treasury Secretary Timothy Geithner said in a Wall Street Journal column today with the finance ministers of Indonesia and Singapore that Asia-Pacific nations need “market-oriented” currencies that are in line with economic fundamentals to encourage new sources of growth.

The Australian dollar advanced to as high as 93.70 U.S. cents, a level not seen since August 2008, after the jobs report. New Zealand’s currency appreciated to as much as 74.42 U.S. cents as a report showed retail sales unexpectedly rose last quarter and Finance Minister Bill English said the country can afford to start withdrawing stimulus.

-- With assistance by Bob Chen in Hong Kong, Zijing Wu in London, Haslinda Amin and Wes Goodman in Singapore and Akiko Ikeda in Tokyo. Editors: Darren Boey, Linus Chua.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

Last Updated: November 12, 2009 04:06 EST