Japanese Government Bonds Fall as G-7 Acts to Weaken Yen, Stocks Advance

Japan’s 10-year government bonds declined, trimming this week’s advance, after stocks gained and the Group of Seven said their central banks will jointly intervene in the currency market to weaken the yen.

Benchmark yields rose from near a two-month low after domestic stocks climbed as the yen depreciated, boosting the earnings outlook for the country’s exporters. The yield premium investors demand to hold 30-year debt instead of five-year notes was near the highest level in three months on concern the government will sell more bonds to finance reconstruction after the nation’s biggest earthquake.

“Japan is still the world’s third-biggest economy, so it can’t be ignored,” said Kiyoshi Ishigane, a senior strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees about $86 billion. “A gain in stocks triggers a shift of funds, causing bonds to be sold.”

The benchmark 10-year yield added one basis point to 1.21 percent as of 3:14 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2021 lost 0.09 yen to 100.802 yen. The yield dropped to 1.145 percent on March 15, the lowest since Jan. 5.

It slid six basis points since March 11, the biggest weekly drop since the period ended Oct. 8.

Ten-year bond futures for June delivery rose 0.04 to 139.74 at the Tokyo Stock Exchange. The Nikkei 225 (NKY) Stock Average gained as much as 3.5 percent.

The yen weakened 3.6 percent to 81.72 per dollar today after appreciating to 76.25 yesterday, surpassing its peak reached in April 1995. A stronger yen makes Japanese exports more expensive overseas and reduces the value of overseas earnings at the nation’s companies when repatriated.

Construction Bonds

Each of the G-7 members will sell yen as their markets open, Japan’s Finance Minister Yoshihiko Noda told reporters in Tokyo today. The G-7 said in a joint statement after a conference call of its finance ministers and central bank chiefs that it will “provide any needed cooperation” with Japan.

The yield spread between 30-year debt and 5-year notes was 1.73 percentage points, the widest since Dec. 7.

The Sankei newspaper said Japan’s government may sell more than 10 trillion yen ($122 billion) of reconstruction debt, all of which the Bank of Japan may buy. Although law prohibits the central bank from underwriting government bonds unless there is a “special” reason, the earthquake is judged as a special reason, the report said.

“When it comes to the economy, it’s all about how much you spend,” said Mitsubishi UFJ’s Ishigane. “Even if you build a pyramid, destroy it and rebuild it, you can increase GDP.”

5-Year Yields

Economic and Fiscal Policy Minister Kaoru Yosano said the BOJ can’t directly underwrite government bonds under law. That the central bank would purchase all of a potential issue of 10 trillion yen in bonds is “unthinkable,” he said.

Richard Wright, an investment manager at RBW Capital Advisors LLC, forecast Japan’s yields will rise as stocks climb.

“You’re going to see yields go from 1.2 percent up to 3 percent in the next 12 months,” he said in an interview with Bloomberg Television.

Five-year yields slid two basis points to 0.48 percent as the central bank continued to provide additional liquidity. The Bank of Japan pumped 4 trillion yen into the financial system in one-day operations today. The move increased the total amount of emergency funding this week to 38 trillion yen.

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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