April 13 (Bloomberg) -- Japanese 20-year bonds fell after the government said it will sell more debt to help finance Prime Minister Taro Aso’s record stimulus package.

Yields approached the highest level in almost five months after Finance Minister Kaoru Yosano said on April 10 the government will sell more than 10 trillion yen ($99.7 billion) in bonds to help pay for the 15.4 trillion yen plan. Bond losses were limited after a central bank report showed wholesale prices dropped at the fastest pace in almost seven years, adding to signs the economy may return to deflation.

“The government may try to raise funds needed to finance a third stimulus package by selling more 20- and 30-year debt as well as shorter-dated notes,” said Makoto Yamashita, chief Japan interest-rate strategist at Deutsche Securities Inc. in Tokyo. “Rising debt sales will be a worry for the market.”

The yield of benchmark 20-year bonds rose 1.5 basis points to 2.12 percent as of 4:30 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.9 percent security due in March 2029 fell 0.203 to 96.918.

The yield of 10-year debt was unchanged at 1.45 percent. Ten-year bond futures for June delivery closed 0.02 higher at 136.70 in Tokyo. A basis point is 0.01 percentage point.

Japan’s producer prices, the costs companies pay for energy and raw materials, sank 2.2 percent in March from a year earlier, the biggest slide since May 2002, the Bank of Japan said in Tokyo today. That compares with a median estimate of 27 economists surveyed by Bloomberg News for a 1.8 percent decline.

Earnings Season

Including financial measures and guarantees, the latest stimulus plan will total 57 trillion yen, Aso said at a press conference on April 10. His third package since taking office in September would take total spending to 25 trillion yen.

The Ministry of Finance said in December it plans to boost bond sales by 7 trillion yen to 113.3 trillion yen in the financial year that began on April 1.

Investors may start buying bonds now that yields are approaching attractive levels, according to Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets.

“Many investors feel that 10-year debt with yields near 1.5 percent and 20-year bonds with rates near 2.1 percent are a buy,” Sakurai said. “If the reporting season fails to meet the market’s expectations, the optimism about the long-awaited bottoming out of the global economy may wane.”

Profits at companies listed on the Standard & Poor’s 500 Index fell 38 percent on average in the first quarter, according to analysts’ estimates compiled by Bloomberg.

Yield Curve

Bonds also fell before the Ministry of Finance auctions 500 billion yen in 30-year bonds tomorrow. Primary dealers, which are required to bid at government debt sales, normally cut holdings of bonds in case prices fall before they can pass on the new securities to investors.

“Pre-auction reduction of positions may steepen the yield curve,” said Jun Ishii, chief strategist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank.

The so-called yield curve may steepen on speculation the Bank of Japan will increase purchases of short-term notes to help absorb the increase in debt sales, said Tatsuo Ichikawa, senior strategist at RBS Securities Japan Ltd. in Tokyo.

“While the BOJ may refrain from boosting outright purchases of longer-dated bonds, it may be able to buy shorter bills or notes to help finance the stimulus measures,” Ichikawa said.

The central bank expanded its monthly government bond purchases from lenders to 1.8 trillion yen from 1.4 trillion yen at its meeting in March. Since it cut the key interest rate to 0.1 percent in December, the bank has also been buying corporate debt and stocks to prevent a credit crunch from worsening.

Yields on five-year notes fell 1.5 basis points to 0.85 percent, widening the yield difference between the securities and 20-year debt. The spread stood at about 127 basis points today, the most since November.

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

Last Updated: April 13, 2009 03:48 EDT