Feb. 13 (Bloomberg) -- Japanese 10-year government bonds completed their largest weekly gain this year on optimism the Bank of Japan will increase debt purchases and add policies to help support financial markets.

Ten-year yields were close to the lowest since Jan. 28 after falling eight basis points this week as BOJ Governor Masaaki Shirakawa said the central bank will examine measures to help companies acquire funding at its two-day policy meeting starting Feb. 18. Demand for bonds also increased before a report on Feb. 16 that economists say will show the Japanese economy contracted the most since the 1974 oil crisis.

“The BOJ may examine extra cash injections by buying more treasury bills,” said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo. “I recommend buying bonds, especially 10-year debt.”

The yield on the 1.3 percent bond due December 2018 was unchanged at 1.255 percent as of 4:06 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price was at 100.393 yen. The yield yesterday touched 1.25 percent, the lowest since Jan. 28.

Ten-year bond futures for March delivery rose 0.06 to 139.36 as of the afternoon close in Tokyo. The contracts advanced 1.01 this week. A basis point is 0.01 percentage point.

Japan’s government bonds handed investors a loss of 0.4 percent this year, less than the 1.4 percent loss on U.S. Treasuries, according to indexes compiled by Merrill Lynch & Co.

Time Frame

After slashing interest rates to near zero, the central bank focused on buying assets from financial institutions, judging that may encourage them to lend to companies facing a credit shortage. The bank last week resumed a program to purchase shares held by lenders to help shore up their capital, which has been depleted by the global financial turmoil.

The BOJ may extend the length of programs designed to boost credit flow by 18 months, the Nikkei reported today, without saying where it got the information. The BOJ originally planned to stop purchasing commercial paper March 31, the Nikkei said.

The difference between what the government and Japan’s banks pay to borrow for three months, the so-called TED spread, was 49 basis points, compared with an average of 30 basis points last year, Bloomberg data show.

Gains in bonds were limited today as stocks advanced, reducing demand for fixed-income securities.

“Yields will be reluctant to decline after” U.S. bonds fell and stocks were stable, said Jun Ishii, a fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo.

Stock Gains

The Nikkei 225 Stock Average gained 1 percent and the broader Topix index advanced 0.6 percent. Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.65 with the Nikkei 225 in the past two weeks, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.

Demand for bonds may also weaken as the global supply of debt increases on economic stimulus packages.

Congress may soon pass an economic stimulus bill after U.S. lawmakers agreed on a $789 billion package that increases government spending and cuts taxes. Japan’s Prime Minister Taro Aso in December announced plans to inject as much as 12 trillion yen ($132 billion) into the nation’s banks.

“The U.S. market is unstable and it’s not easy for investors to take on positions,” said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo.

The spread between 10-year U.S. Treasuries and similar-dated Japanese bonds expanded to 1.52 percentage points yesterday, from 1.44 percentage points on Feb. 11, according to Bloomberg.

Slowing Economy

Japan’s economy is deteriorating at a pace unseen in the past half century, said Kazuo Momma, head of research and statistics at the BOJ. The economy may shrink at a similar pace in the three months ending March, he said on Feb. 9.

Gross domestic product for the three months ended Dec. 31 contracted an annualized 11.6 percent, the sharpest slowdown since 1974, according to a Bloomberg News survey of economists.

Ten-year yields are likely to fall to 1.17 percent by the end of March, according to a weighted Bloomberg News survey of economists and analysts. Should those predictions prove accurate, investors who buy the debt today, will make a return of 0.9 percent, according to Bloomberg calculations.

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

Last Updated: February 13, 2009 02:14 EST