Japan’s Bonds Complete Biggest Weekly Decline in Eight Months

Japan’s benchmark bonds completed their biggest weekly decline in almost eight months as Ichiro Ozawa’s bid for the nation’s premiership raised concern his victory will lead to soaring government spending.

Benchmark 10-year yields climbed to 1 percent for the first time since Aug. 13 after Ozawa, who heads the largest faction in the ruling Democratic Party of Japan, said he will challenge Prime Minister Naoto Kan for the party’s leadership. Bonds also fell as stocks rallied at the end of the week on speculation the government will increase measures to curb the yen’s strength, damping demand for the relative safety of government debt.

“Ozawa’s announcement makes it difficult to see whether the DPJ will aim to reform Japan’s finances or will spend lavishly,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages about $310 billion. “Selling bonds would probably be a right answer if Ozawa wins as an aggressive fiscal policy increases supply of bonds.”

The yield on the benchmark 10-year bond climbed 7.5 basis points this week to 1 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security due June 2020 fell 0.683 yen to 100.892 yen. It was the biggest weekly increase in 10-year yields since Jan. 8.

Ten-year bond futures for September delivery slid 0.31 to 142.55 in Tokyo, the first weekly drop since July 9.

Ozawa, who quit his post as DPJ secretary-general in June amid campaign finance scandals, announced his intention on Aug. 26 to compete against Kan at a Sept. 14 contest. The party’s majority in the lower house of parliament ensures that its leader becomes prime minister.

‘Big Spending’

“Ozawa is known for big spending policies, and if he won the race, he may push for such measures,” said Hideyuki Suzuki, Tokyo-based general manager of investment market research department at SBI Securities Co.

Japan’s public debt is 180 percent of the economy, the highest among members of the Organization for Economic Cooperation and Development. Central and local government borrowing totaled 882.9 trillion yen ($10.4 trillion) as of March 31, up 4.3 percent from a year earlier, according to figures from the Ministry of Finance.

Bonds also fell as stocks gained after Chief Cabinet Secretary Yoshito Sengoku said yesterday Kan would meet Japanese business executives to discuss measures to stem the yen’s gains.

The yen has advanced against all of its 16 major counterparts this year and reached 83.60 per dollar on Aug. 24, the strongest since June 1995. A higher yen reduces the value of overseas sales at Japanese companies when repatriated.

The Nikkei 225 Stock Average rose 1 percent yesterday, paring its weekly loss to 2.1 percent.

‘Catalyst to Sell’

“The government hasn’t brought out any detailed plan to halt the yen’s appreciation yet,” said Kiyoshi Ishigane, a strategist in Tokyo at Mitsubishi UFJ Asset Management Co. in Tokyo, which oversees about $65 billion. “Investors have been waiting for a catalyst to sell.”

Bond losses were limited after a government report yesterday showed consumer prices excluding fresh food fell 1.1 percent in July from a year earlier, a 17th month of declines. Deflation increases the value of the fixed payments from bonds.

“The darkening outlook for the global economy is putting off a rebound in consumer prices,” said Hiroshi Morikawa, a strategist in Tokyo at MU Investments, which manages about $14 billion in assets.

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