Oct. 3 (Bloomberg) -- Japanese bonds rose, pushing down 10- year yields from near the highest in more than six weeks, on speculation a U.S. economic slowdown will prompt the Bank of Japan to hold off raising interest rates this year.

A report today may show the slowest growth in U.S. service industries in six months, after signs of a property market slump spurred gains in Treasuries yesterday. Japanese Finance Minister Fukushiro Nukaga yesterday said the government needs to keep watching how the U.S. housing slump affects the global economy.

``The gain in U.S. Treasuries is favorable to Japanese bonds,'' said Yoshimasa Kato, a fund manager in Tokyo at Deutsche Asset Management (Japan) Ltd., a unit of Europe's third-biggest bank. ``It's difficult for the BOJ to justify raising rates this year as the U.S. economy is struggling.''

The yield on the 1.7 percent debt due in September 2017, which was auctioned yesterday, fell half a basis point to 1.69 percent as of 4:01 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer bond broker. A basis point is 0.01 percentage point. Bond prices move opposite to yields.

Ten-year bond futures for December delivery rose 0.01 to 134.90 as of the 3 p.m. close at the Tokyo Stock Exchange.

Bonds in Japan and the U.S. often move in the same direction. Yields on Japanese and U.S. 10-year bonds had a correlation of 0.91 this year, according to data compiled by Bloomberg. A value of 1 would mean they moved in lock step.

Focus on U.S.

Japanese government bonds have returned 1.6 percent so far in the second half of this year, compared with 4 percent for Treasuries, according to indexes compiled by Merrill Lynch & Co.

The Institute for Supply Management will say today its non- manufacturing index fell to 54.6 in September, compared with 55.8 in August, according to the median estimate of 72 economists surveyed by Bloomberg. A reading over 50 signifies expansion. The U.S. is Japan's largest overseas market.

Interest-rate futures show traders see a 74 percent chance the U.S. Federal Reserve will cut its benchmark rate by a quarter-percentage point at its next meeting on Oct. 31.

The probability the BOJ will increase rates on Oct. 11 was little changed at 4 percent, according to calculations by Credit Suisse Group using overnight interest rate swaps.

Gains in bonds were limited on speculation rising stocks cut demand for the relative safety of government debt.

The Nikkei 225 Stock Average rose 0.9 percent to 17,199.89, the highest since July 31.

Unattractive Yields

Yields are not high enough to lure investors after lower demand at a 10-year government bond auction yesterday, said Susumu Kato, chief economist in Tokyo at Calyon Securities, one of the 26 primary dealers required to bid at government debt sales. The auction drew bids for 2.71 times the amount on offer, lower than last month's ratio of 2.77.

``Some investors are waiting for the yields to get back to 1.7 percent,'' said Calyon's Kato. ``Below 1.7 percent is a little bit difficult to buy.''

Concern over a slowdown in global growth has prompted analysts to lower their forecasts on yields. Ten-year yields may rise to 1.9 percent by the end of March, according to the September median forecast in a Bloomberg survey of economists and analysts. The estimate fell from 2 percent in August.

Declining CPI

Bonds gained amid speculation a cut in calling charges of mobile providers will help push down consumer prices.

KDDI Corp. will in November offer a new mobile-phone plan that cuts call charges by about 30 percent and increases handset prices by about 20,000 yen, the Nikkei newspaper reported yesterday, without saying where it got the information. KDDI's major rival, NTT DoCoMo Inc., may introduce a similar plan.

``It is only a matter of time before the new plan may be reflected in the CPI calculation, pushing down core prices,'' said Yasunori Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

Japan's consumer prices fell for a seventh month in August, as retailers absorbed higher costs to attract customers, the statistics bureau said on Sept. 28.

The extra yield for conventional government debt over inflation-linked bonds, known as the breakeven inflation rate, was about 32 basis points today, according to data compiled by Bloomberg. The spread, which shows what the market expects consumer prices to average in the next decade, has fallen from 64 basis points on June 8, the highest since September 2006.

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

Last Updated: October 3, 2007 03:51 EDT