Japan Bonds Gain, Yields Fall to Seven-Year Low on BOJ Easing Speculation

Japanese bonds rose, pushing benchmark 10-year yields to the lowest level since 2003, amid speculation the government will persuade the central bank to take further measures to keep borrowing costs low.

Ten-year bonds also climbed for a third day after a U.S. report last week showed growth in the world’s largest economy slowed last quarter more than analysts forecast, a sign the global recovery is losing traction. Prime Minister Naoto Kan today asked for cooperation from the Bank of Japan to combat the nation’s rising jobless rate.

“Pressure on the BOJ will continue to increase with rising concerns about a slowdown in the economy under restricted government finances,” said Koji Shimamoto, chief strategist at BNP Paribas Securities Japan Ltd., a unit of France’s largest bank by assets. “Speculation about additional loosening is positive for the bond market.”

The yield on the 10-year bond dropped one basis point to 1.045 percent as of 3:40 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security due June 2020 advanced 0.090 yen to 100.492 yen. The yield dropped to 1.040 percent, the lowest since August 2003.

Ten-year bond futures for September delivery rose 0.14 to 141.98 at the afternoon close of the Tokyo Stock Exchange. The contracts climbed to a seven-year high of 142.08 on July 22.

Prime Minister Kan said today it’s important the central bank cooperate with the government, and he would like the BOJ to exert effort to improve the job market.

Three ‘Ds’

U.S. economic growth slowed to an annualized 2.4 percent in the second quarter from 3.7 percent the previous three months, the Commerce Department said July 30. The U.S. was Japan’s second-biggest export market after China by the value of products shipped during the first half of 2010, according to the Ministry of Finance.

“Investors are weighing up the three ‘Ds’ of the global economy: the duration, depth and dispersion of a possible slump,” said Akio Yoshino, chief economist at Tokyo-based Amundi Japan Ltd., which manages the equivalent of $35 billion. “Until answers to the three Ds become clear, the bond market will remain resilient.”

The gain in bonds was tempered on speculation primary dealers cut their holdings before the Ministry of Finance sells 2.2 trillion yen ($25.4 billion) of 10-year debt tomorrow. Primary dealers are required to bid at government debt sales.

Ten-year yields may rise to 1.3 percent by year-end after investors conclude the so-called three Ds aren’t serious, Amundi’s Yoshino said. Investors buying the debt today would lose 1.7 percent should his forecast prove accurate, according to Bloomberg calculations.

Cash Reserves

Japan’s 10-year yields may drop toward a record as companies hoard cash to guard against another credit crunch, MU Investments Co. said.

Yields may fall to as low as 0.5 percent as companies build up buffers against a repeat of the lending freeze that followed Lehman Brothers Holdings Inc.’s collapse in September 2008, said Hiroshi Morikawa, a strategist at MU Investments in Tokyo. Rates will slide further as cash is deposited at banks, which invest those funds in government debt, he said.

The cash reserves held by Japanese businesses, excluding financial institutions, rose to a near record as a proportion of capital-investment needs, based on quarterly data compiled by the Ministry of Finance.

“Businesses are eager to hold onto cash, which is the legacy of Lehman’s collapse,” Morikawa said. Yields won’t rise until investors gauge companies will soon be “substantially gearing up for capital spending, which will then boost demand for bank lending. That’s unlikely for at least half a year,” he said.

To contact the reporter on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net.

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