Japan's Government Bonds Decline as Signs of U.S. Recovery Reduce Demand

Japan’s bonds fell for a third day as signs the U.S. economic recovery is picking up reduced demand for the relative safety of debt.

Benchmark 10-year yields reached a two-week high before a government report forecast to show the world’s largest economy added the most jobs since 1983. Finance Minister Naoto Kan, the frontrunner to become Japan’s new prime minister, said he has no instant fix to rein in the world’s largest public debt and expects voters will punish the ruling Democratic Party of Japan at next month’s mid-term elections.

“Investors are hesitant to take new positions, as expectations rise that the U.S. economy has bottomed out,” said Koji Ochiai, a chief market economist in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Kan has emphasized fiscal restructuring, a weaker yen and the BOJ’s monetary easing, but I’m not sure he can maintain those stances as premier.”

The yield on the 1.3 percent bond due June 2020 rose one basis point to 1.290 percent at 9:47 a.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.089 yen to 100.088 yen.

That was the highest yield since May 18. A basis point is 0.01 percentage point. Ten-year bond futures for June delivery dropped 0.12 to 140.32 at the Tokyo Stock Exchange.

The U.S. added 536,000 workers in May, according to the median estimate of economists in a Bloomberg News survey ahead of the Labor Department’s report today. The U.S. jobless rate fell to 9.8 percent in May from 9.9 percent in April, according to a separate survey.

U.S. Jobs

“Good supply-demand conditions for bonds are likely to abate before the U.S. jobs data come out,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “Ten-year bonds should stay under downward pressure.”

U.S. Treasury Secretary Timothy F. Geithner said the nation’s economy is showing signs that companies are starting to hire more workers as the recovery strengthens.

“You’ve seen in the last five to six months, a pretty steady, gradual increase in the amount of jobs the private sector is creating,” Geithner said in an interview broadcast yesterday on CNBC.

Foreign Minister Katsuya Okada and Transport Minister Seiji Maehara yesterday backed Kan, removing his two most senior leadership rivals. Prime Minister Yukio Hatoyama announced his resignation on June 2 after less than nine months in office, citing a broken promise to relocate U.S. troops.

“I don’t think fiscal rehabilitation can be done overnight,” the finance minister told reporters last night in Tokyo. “I don’t think we can be optimistic” about the election even after changing leaders, Kan said.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

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