Nov. 16 (Bloomberg) -- Japan’s bonds rose for a fifth day, the longest rally in three months, as a drop in some stocks outweighed a government report that showed the world’s second- largest economy grew at a faster pace than economists forecast.

Ten-year yields fell to match the lowest level in almost four weeks as the Topix index of shares slipped on concern companies will sell more equities to raise funds. Gross domestic product rose an annualized 4.8 percent last quarter, following a revised 2.7 percent expansion in the three months ended June 30, the Cabinet Office said in Tokyo.

“The GDP report paints a positive picture of the Japanese economy, but the shape of the economy going forward is still unclear,” said Makoto Yamashita, chief Japan interest-rate strategist at Deutsche Securities Inc. in Tokyo. “We’ll see some rapid adjustments in the bond market today following last week’s gains.”

The yield on the 1.4 percent bond due September 2019 fell one basis point, or 0.01 percentage point, to 1.33 percent as of 4:22 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price gained 0.087 yen to 100.608 yen. Yields are matching the level reached on Nov. 13, the lowest since Oct. 19.

Five-year yields declined half a basis point to 0.615 percent. Ten-year bond futures for December delivery closed little changed at 138.86 at the Tokyo Stock Exchange. The Topix fell 0.7 percent.

Stimulus Spending

Economists in a Bloomberg survey estimated the Japanese economy had grown 2.9 percent last quarter. The acceleration in the economy is projected to fade as the impact of stimulus spending wanes and job losses restrain consumer spending. The government is spending more than 20 trillion yen ($223 billion) to bolster the economy, expanding debt toward 200 percent of GDP.

Finance Minister Hirohisa Fujii said Nov. 13 that today’s GDP report will be “one of the important factors” in deciding whether to compile an extra spending plan in the year ending March 2010. Japan may need to sell more bonds in the current fiscal year because tax revenue could fall below 40 trillion yen, Vice Finance Minister Yoshihiko Noda said last month.

“Many market participants are still concerned about supply,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. “Bonds will fall today.”

Japanese debt maturing in more than 10 years has handed investors a loss of 2.6 percent since Dec. 31, as measured by Merrill Lynch & Co. indexes, heading for the worst year since 2003.

Deflation, Policy Rates

Japan may declare the nation is in deflation, Nikkei Telecom said, without saying where it got the information. The statement may be included in a Nov. 20 monthly economic report at the earliest, the report said.

Twenty-year yields, which are more sensitive to changes in the inflation outlook than shorter-maturity notes, declined two basis points to 2.08 percent. Deflation enhances the value of the fixed payments from debt.

So-called real yields, or what investors get after accounting for the cost of living, were at 3.63 percent today. They rose to as high as 3.8 percent earlier this month, the most since 1995, according to data compiled by Bloomberg.

The Bank of Japan on Nov. 12 said the costs companies pay for energy and unfinished goods tumbled 6.7 percent in October from a year earlier, a 10th month of declines. Consumer prices fell 2.3 percent in September.

The central bank last month forecast deflation will persist through fiscal 2011, indicating the central bank is unlikely to raise interest rates from near zero. Central bank Governor Masaaki Shirakawa on Nov. 7 pledged to maintain an “extremely accommodative monetary environment.”

There is a 9 percent chance the central bank will boost borrowing costs by the middle of next year, according to calculations by JPMorgan Chase & Co. using overnight interest- rate swaps.

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

Last Updated: November 16, 2009 02:37 EST