Japan’s 10-year bond yields will be capped at 1.2 percent as concern wanes that Ichiro Ozawa will replace Naoto Kan as prime minister and boost government spending, according to Okasan Asset Management Co.
Benchmark yields are likely to approach the “lower 1 percent level” as investors buy bonds after the nation’s new leader is determined at a Sept. 14 party election, said Satoshi Yamada, fixed-income trading manager at Okasan Asset in Tokyo. Yields jumped almost a third of a percentage point to as high as 1.195 percent in the weeks following Ozawa’s Aug. 26 announcement that he would challenge Kan.
“The ‘Ozawa shock’ prompted a rush of bond selling, causing yields to surge at an unexpected pace,” Yamada said. “Higher yields are beginning to attract investors.”
The yield on the benchmark 10-year bond rose two basis points to 1.14 percent as of 10:39 a.m. in Tokyo, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. A basis point is 0.01 percentage point.
Ozawa said two days ago the government may have to issue more bonds to boost the economy in the face of deflation and a strengthening currency. He last week unveiled a 2-trillion-yen ($24 billion) stimulus package, more than twice as big as Kan’s proposal, at a time when the government is attempting to rein in debt approaching 200 percent of gross domestic product.
The head of the ruling party’s largest faction has pledged to double a monthly childcare allowance and extend the period of subsidies for energy-efficient household appliances. The winner of next week’s election will become prime minister because the Democratic Party of Japan controls the lower house.
Japanese bonds on Sept. 7 rose for the first time in five days after Banri Kaieda, one of 25 lawmakers to sign a petition backing Ozawa’s candidacy, said the situation is “very severe” regarding support for the challenger.
Voters favor Kan to remain prime minister by a margin of more than three to one, according to surveys released this week. Sixty-six percent of those polled prefer Kan as leader compared with 18 percent for Ozawa, the Yomiuri newspaper reported, while a survey by the Asahi newspaper showed a similar result.
Lingering concerns over the U.S. economy will also help cap Japan’s bond yields, according to Koji Ochiai, chief market economist at Mizuho Investors Securities Co. in Tokyo.
The Federal Reserve said on Sept. 8 in its Beige Book report that the U.S. economic expansion showed “widespread signs of deceleration” in mid-July through the end of August.
Japan’s 10-year yields are likely to stay below 1.2 percent, Ochiai said.