Japan’s Yields May Reach 0.5% Even as Bonds Sold to Rebuild, Barclays Says

Japan’s 10-year yields may decline to 0.5 percent by the first quarter of next year, even as the nation sells additional debt to pay for rebuilding after its strongest earthquake, according to Barclays Capital Japan Ltd.

Benchmark yields are projected to reach the lowest level since June 2003 because the government of Prime Minister Naoto Kan will likely sell fewer additional bonds than Taro Aso’s administration did in the wake of the global financial crisis, said Chotaro Morita, chief strategist at Barclays in Tokyo.

“Japan’s government has the financial resources to pay for reconstruction, such as money in reserve for the fiscal 2011 budget,” Morita said at a forum hosted by Barclays in Tokyo yesterday. “So additional bond issuances may be limited” to zero to 8 trillion ($93.6 billion) yen.

Ten-year yields reached a two-month low of 1.145 percent on March 15 after the March 11 quake and tsunami that triggered a nuclear crisis. Yields rose to 1.305 percent yesterday as some legislators advocated that the Bank of Japan buy debt directly from the government to pay for the reconstruction.

Ten-year yields won’t likely exceed 1.35 percent reached on Feb. 9, Morita said. The rate will decline to 0.9 percent by the end of 2011 and to as low as 0.5 percent during the first three months of 2012, ending the quarter at 0.7 percent, he said.

Yields will reach 1.28 percent by year-end and 1.26 percent by March 2012, according to the weighted average forecasts of analysts surveyed by Bloomberg.

Japan’s gross domestic product will contract in the three months through June, before expanding in the following quarter as relief efforts push up growth, Morita said. Still, Japan’s yields won’t likely move in line with the domestic economy alone, and may be pushed down by a cyclical slowdown in the global economy in the latter half of this year, he said.

“Downward pressure on yields may be stronger than expected once the momentum of economic expansion slows,” he said.

To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net.

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

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