Nov. 5 (Bloomberg) -- Japan’s government bonds declined, boosting 10-year yields to a three-month high, as concerns over increasing debt sales damped demand at an auction.

Yields rose for a second day after Japanese Vice Finance Minister Naoki Minezaki said today the shortfall in tax revenue was worse than expected. Finance Minister Hirohisa Fujii said yesterday the government will likely sell debt to fill the gap. Today’s 2.1 trillion yen ($23.1 billion) sale attracted bids for 2.42 times the amount on offer, below the ratio of 3.5 times at October’s sale, which had the highest ratio since May 2007.

“Worries about swelling debt sales are spreading,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “Investors are turning cautious.”

The yield on the benchmark 10-year bond rose 4.5 basis points to 1.44 percent, the highest since Aug. 11, at 4:15 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the securities fell 0.385 to 98.791 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery dropped 0.36 to 137.60 yen at the Tokyo Stock Exchange.

The Finance Ministry said last week it will increase annual sales of government bonds in the fiscal year ending in March 2010 by 2.1 trillion yen to a record 132.3 trillion yen. The estimate did not factor in a shortfall in tax revenue.

Increased sales of one-year bills and five-year notes will begin this month and greater sales of two- and 10-year debt will start in December, the ministry said on Oct. 30.

Supply Vulnerability

The lowest price at the 10-year auction was 0.14 yen below the average price, compared with a difference of 0.01 at last month’s sale. The so-called tail is the difference between the lowest and the average price. The longer the tail, the less bids are clustered around the average price.

“Today’s 10-year auction highlighted supply vulnerabilities in the market,” Christian Carrillo, a senior interest-rate strategist at Societe Generale SA in Tokyo, wrote in a report. “The high accepted yield was just over 1.45 percent, a level which onshore is supposedly looking as psychological support, so further increases from there would be seen as bearish for the market.”

Bond losses were tempered by speculation the Bank of Japan will keep interest rates near zero to help the economy.

BOJ board members at a meeting last month said it was important to communicate that ending emergency credit-easing measures didn’t mean the central bank is preparing to raise interest rates, according to minutes released today.

Low Rates

“The view remains that rates will stay low,” said Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo. “This perception will prevent increases in yields.”

Central bank Governor Masaaki Shirakawa and his colleagues last week decided to end their programs of purchasing corporate debt in December as central banks around the world phase out emergency measures taken at the height of the financial crisis.

The Bank of Japan will leave its key rate unchanged at 0.1 percent until at least the fourth quarter of 2010, according to Bloomberg News survey of economists.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net

Last Updated: November 5, 2009 02:19 EST