Feb. 23 (Bloomberg) -- Japanese bond futures had their biggest gain in a week as stocks fell after a report showed export growth slowed.

Ten-year bonds have been underpinned since ending their longest slide in four months on Feb. 16, the day a government report showed the economy contracted in the last three quarters of last year. Shares of exporters such as Nissan Motor Co. and Bridgestone Corp. led the stock market lower.

``Japan's economy remains on a plateau and it will probably take some more months to rebound,'' said Tsutomu Kawasaki, who helps oversee the equivalent of about $10.6 billion in Japanese bonds at Pension Fund Association in Tokyo, which has more than 1,600 corporate pension funds as members. ``There's no reason to sell bonds at these levels and in this environment.''

Ten-year bond futures for March delivery rose 0.30 to 138.83 as of 2:26 p.m. The Nikkei 225 Stock Average fell as much as 1.3 percent.

The benchmark 1.3 percent bond due in December 2014 gained 0.172 to 99.05, according to Japan Bond Trading Co. Its yield fell 2 basis points to 1.41 percent. A basis point is 0.01 percentage point.

The yield rose as high as 1.465 percent on Feb. 15, the highest in more than two months.

``Ten-year yields above 1.4 percent are a place to buy,'' said Makoto Yamashita, a Tokyo-based economic strategist at UFJ Tsubasa Securities Co., one of the 26 primary dealers invited to discuss bond sales with the Ministry of Finance. The yields may fall to 1.39 percent, Yamashita said.

3.2 Percent

Exports grew 3.2 percent from a year earlier, compared with December's 8.8 percent gain, the Ministry of Finance said in Tokyo.

The Nikkei 225 Stock Average fell for a third day, the longest losing streak in a month. The drop in stocks yesterday helped bonds reverse losses after an auction yesterday of 20- year debt drew less demand than the previous sale.

Japanese stocks tracked a plunge in U.S. shares yesterday as a surge in oil prices above $51 a barrel spurred concern that rising energy costs may dent global economic growth. The Dow Jones Industrial Average had its biggest decline since August.

Two-year notes may fall on speculation the Bank of Japan will temporarily allow the amount of reserves available to lenders to fall after April.

Bank of Japan Governor Toshihiko Fukui said the central bank will decide after April if its current target of reserves is sustainable. He spoke in Parliament in Tokyo.

Receding Demand

The central bank kept its target for reserves at between 30 trillion yen ($286.1 billion) and 35 trillion yen at its meeting last week. The target, which is the bank's principal policy tool, is used to pump cash into the banking system and hold interest rates close to zero percent.

Two policy makers said at the Jan. 18-19 meeting that the Bank of Japan may need to allow reserves to drop because of receding demand for cash among banks, according to minutes released yesterday.

``The market could interpret this as a signal policy is about to be tightened, which is not necessarily the case,'' said Christian Carrillo, Tokyo-based Japan rates strategist at ABN Amro Securities Japan Ltd. ``Any change reflects the weak lending ability of the banks rather economic strength.''

The 0.1 percent note maturing in February 2007, among the securities most sensitive to changes in interest-rate policy, has yet to trade today through Japan Bond Trading Co. Its yield yesterday rose half a basis point to 0.11 percent.

Keeping Pace

Bonds also rose on speculation investors such as pension funds will buy government debt to keep pace with a record change in the Nomura Bond Performance Index scheduled for next week.

Nomura Securities Co. will add debt sold in February including 10-, 20- and 30-year bonds to the index and remove securities due in a year or less.

Money managers such as the Government Pension Investment Fund, which runs the world's largest pool of retirement wealth, try to match their performance to the index.

``There will probably be some buying from passive funds, which emulate changes in the index,'' Pension Fund Association's Kawasaki said. ``That may help bonds.'' He declined to say what he's doing with his holdings.

The index's duration will be extended by about 0.19 year on March 1, according to Nomura Securities Financial and Economic Research. Duration measures a bond price's sensitivity to changes in yield.

The extra yield U.S. 10-year notes offer over similar maturity Japanese bonds was 2.86 percentage points yesterday, declining from 3.01 percentage points on Dec. 2.

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

Last Updated: February 23, 2005 00:30 EST