Dec. 1 (Bloomberg) -- Japanese five-year government notes rose for a second day after public broadcaster NHK reported that the Bank of Japan will meet this week to devise a plan to increase bank lending.

The central bank will meet to discuss boosting funding by widening the range of securities banks can use as collateral in so-called repurchase agreements when they borrow money, NHK said. The Ministry of Finance will sell 1.9 trillion yen ($19.9 billion) of 10-year notes tomorrow in the last auction of the debt this year.

The Bank of Japan may “provide more liquidity to stabilize repo rates, which may support shorter-end” bonds, said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., one of the 24 primary dealers required to bid at government auctions. “The upside to longer-dated bonds is limited given the 10-year auction.”

The yield on the 1 percent note due September 2013 fell one basis point to 0.86 percent as of 4:49 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.046 yen to 100.644 yen.

Ten-year yields increased one basis point to 1.405 percent. Ten-year bond futures for December delivery closed 0.01 higher at 139.39 at the Tokyo Stock Exchange. A basis point is 0.01 percentage point.

Under plans being considered by the BOJ, banks would be able to use corporate bonds with lower credit ratings as collateral, NHK said, without saying where it got the information.

Emergency Meeting

Central bank Governor Masaaki Shirakawa said today it’s getting more difficult for companies to borrow because investors are shunning risk and banks are becoming more cautious about lending.

The Tokyo repo rate declined almost three basis points to 0.475 percent today, from 0.501 percent on Nov. 28, the highest since Oct. 31. The three-month Tokyo interbank offered rate for yen loans, know as Tibor, rose almost one basis point to 0.883 percent, according to data compiled by Bloomberg.

The central bank will hold a regular two-day policy meeting on Dec. 18. The BOJ lowered its benchmark overnight lending rate to 0.3 percent from 0.5 percent on Oct. 31.

Government reports last month showed the world’s second- largest economy entered its first recession since 2001, industrial production fell more than economists expected and inflation slowed. The Tankan index of large-manufacturers’ confidence, Japan’s main gauge of business activity, is due Dec. 15.

“The Tankan will urge a radical overhaul of the Bank of Japan’s scenario,” said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo. “The BOJ will aggressively supply funds in the second half of this month.”

Hedge-Selling

Primary dealers tend to reduce holdings before auctions in case prices decline before they can pass on new securities to investors.

Pre-auction trading today suggests the finance ministry will set a 1.4 percent coupon on the new 10-year securities, down from 1.5 percent at the last auction in November. The coupon will be announced at 10:30 a.m. tomorrow, followed by the auction results at 12:45 p.m. in Tokyo.

The Nov. 5 sale drew bids worth 2.28 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.58 at the October sale. Last year’s average ratio was 3.05.

“Ten-year bonds will be relatively weak” before the auction, said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., the Japanese unit of the second-largest U.S. bank by assets. “There seems to be some resistance in breaking the 1.355 percent level.”

The demand for bonds also increased as signs the global recession is deepening weighed on stocks. Falling commodity prices dragged on resource shares, causing the Nikkei 225 Stock Average to decline 1.4 percent.

Benchmark bonds have handed investors a return of 0.86 percent so far this quarter through Nov. 28, according to indexes compiled by Merrill Lynch & Co. The stock index has slumped 24 percent in the same period.

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

Last Updated: December 1, 2008 02:52 EST