Japanese Bonds Fall, Snapping Five-Week Rally, on Weaker Yen

Japanese bonds fell this week, with benchmark debt ending five weeks of gains, as a weaker yen improved the outlook for the nation’s export earnings.

Twenty-year bonds also declined before the government sells 1.1 trillion-yen ($13 billion) of the securities on May 26. Prime Minister Naoto Kan said yesterday he will draft multiple supplementary budgets to help the nation recover from a record earthquake, a day after government data showed the economy shrank for a second quarter.

“I expect yields to rise toward the year-end,” said Shinji Nomura, chief debt strategist in Tokyo at SMBC Nikko Securities Inc., one of the 24 primary dealers obliged to bid at the government’s debt sales. “There will be a substantial scale of supplementary budgets as well as demand from rebuilding, so the economy will recover.”

The benchmark 10-year yield climbed 1.5 basis points this week to 1.125 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security due March 2021, which was auctioned on May 12, traded yesterday at 99.778 yen.

Twenty-year yields climbed 2.5 basis points this week to 1.915 percent. Ten-year bond futures for June delivery were unchanged at 140.82.

The yen fell to a three-week low of 82.23 per dollar on May 19. A weaker currency boosts the value of overseas sales at Japanese companies, and counters deflation by pushing up the prices for imports, diminishing the appeal of the fixed payments from government debt.

20-Year Auction

The previous sale of 20-year bonds on April 21 attracted bids for 2.92 times the amount on offer, down from 4.13 times at the auction on March 16.

Kan, speaking yesterday in parliament in Tokyo, said the government will compile its second stimulus plan according to need and timing. Last month, he unveiled an initial 4 trillion yen package.

“If necessary, we’ll do a third and fourth extra budget,” he said.

The decline in bonds was tempered after a government report on May 19 showed the economy shrank more than analysts forecast in the first quarter.

Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop the previous quarter, the Cabinet Office said. Economists surveyed by Bloomberg News predicted a 1.9 percent drop.

Bank of Japan policy makers yesterday kept unchanged their 30-trillion yen credit program and a 10-trillion yen asset- purchase fund.

“Medium- to long-term bonds are good to buy because the Bank of Japan’s policy helps keep their yields low,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co., a unit of Japan’s biggest lender for farmers and fishermen. “Negative growth for this fiscal year is looking more likely,” supporting the bond market.

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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