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Japan's 10-Year Bonds Surge Most in Two Years After Currency Intervention

Japan’s 10-year bonds rose the most in nearly two years on speculation excess funds caused by the nation’s first currency intervention since 2004 will flow into interest-bearing government securities.

The Japanese currency dropped and stocks jumped after the nation acted to weaken the yen from a 15-year high to help exporters. Benchmark bonds climbed for a third day after Bank of Japan board member Tadao Noda said the central bank will use intervention funds to provide liquidity. Moody’s Investors Service said Prime Minister Naoto Kan’s strategy supports the stable outlook on Japan’s debt ratings after he beat Ichiro Ozawa in yesterday’s ruling party leadership vote.

“Unsterilized intervention increases money in the market, so it’s effectively monetary easing,” said Kiyoshi Ishigane, a senior strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees about $65 billion. “With more money flowing in the market, both bonds and stocks typically go up.”

Benchmark 10-year bond yields fell seven basis points to 1.035 percent as of 3:34 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1 percent security due September 2020 rose 0.628 yen to 99.682 yen. That was the biggest decline for 10-year yields since Oct. 6, 2008.

Ten-year bond futures for December delivery gained 0.74 to 142.12 at the 3 p.m. close of the Tokyo Stock Exchange. The Nikkei 225 Stock Average jumped 2.3 percent, the sharpest advance since July 28.

The yen weakened to as low as 85.14 per dollar today after earlier appreciating to 82.88, the strongest since May 1995. A stronger yen reduces the value of overseas sales at Japanese companies when repatriated.

Unilateral Move

Finance Minister Yoshihiko Noda confirmed the intervention and told reporters in Tokyo the move was unilateral. Chief Cabinet Secretary Yoshito Sengoku, asked at a press conference in Tokyo whether the 82 yen per dollar level was being defended, said “that’s what the finance ministry seems to think.”

Central banks conduct auctions of bills to drain excess local currency stemming from foreign purchases, a process known as sterilization.

Bonds also gained on speculation Kan’s victory over Ozawa yesterday will allow him to implement measures to trim the nation’s debt levels.

Kan, a former finance minister, has said he will consider doubling the sales tax to tackle the world’s largest public debt. He has also vowed to end Japan’s prolonged struggle with deflation.

Moody’s Rating

Thomas Byrne, senior vice president at Moody’s, said in an e-mail that Kan’s strategy supports the stable outlook on Japan’s Aa2 rating and the focus will be on whether he can follow through on and flesh out his fiscal plans.

Ten-year yields had gained more than 20 basis points since Aug. 26 when Ozawa said he’d challenge Kan. Ozawa, who heads the DPJ’s largest faction, has said the government may have to issue more bonds for spending measures to boost the economy.

The so-called breakeven rate shows investors’ projections for inflation were little changed after Kan’s victory.

“Intervention alone can’t put the yen in a sustainable depreciation trend,” said Junichi Makino, a senior economist at Daiwa Institute of Research Ltd. in Tokyo. “It worked today, but it doesn’t guarantee it will be effective tomorrow. We can’t really expect effective measures from the government to turn around Japan’s economic stagnation and beat deflation.”

Traders see prices falling an average 0.98 percent annually over the next five years, as measured by the difference in yields between inflation-linked bonds and conventional debt. The breakeven rate has been negative for at least a year.

The United Nations said in its annual Trade and Development report yesterday a continuation of the global expansionary fiscal stance is necessary to prevent a deflationary spiral. Deflation, a general drop in prices, enhances the purchasing power of the fixed payments from debt.

“It’s very difficult to maintain an economic recovery while restructuring a nation’s finances,” said Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd., which manages about $57 billion.

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

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