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Japan’s 20-Year Bonds Fall Before DPJ Chief Election, Auction

Japan’s 20-year government bonds declined for a fourth day before Ichiro Ozawa challenges Prime Minister Naoto Kan for leadership of the ruling Democratic Party of Japan at an election tomorrow.

Longer-maturity bonds dropped on speculation an Ozawa victory would result in an increase in debt-funded government spending. Twenty-year bonds also fell on concern signs of a sustainable recovery will limit bids at an auction of 1.1 trillion yen ($13.1 billion) in the securities on Sept 14.

“Uncertainties over the outcome of the DPJ election may deter buyers at tomorrow’s auction,” said Shinji Nomura, chief debt strategist at Tokyo-based Nikko Cordial Securities Inc., a unit of Japan’s third-largest bank.

The yield on 20-year bonds rose one basis point to 1.93 percent as of 4:27 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.6 percent bond due June 2030 fell 0.136 to 95.279 yen. A basis point is 0.01 percentage point.

The yield of the benchmark 10-year bond fell half a basis point 1.145 percent after earlier reaching 1.165 percent, the highest since Sept 7. Ten-year bond futures for December delivery gained 0.05 to 141.28 yen at the Tokyo Stock Exchange.

The Nikkei 225 Stock Average rose 0.9 percent and the MSCI Asia Pacific Index of regional shares advanced 1.4 percent.

Party Election

Japan’s benchmark bonds completed a three-week loss on Sept. 10 after a Cabinet Office report showed the nation’s economy grew at a faster pace in the second quarter than initially estimated and concern increased Ozawa will become prime minister.

“If Ozawa wins the election, debt issuance may have to increase to a certain extent,” said Kazuhiko Sano, chief strategist in Tokyo at Tokai Tokyo Securities Co., one of 24 primary dealers which are required to bid at debt auctions.

Yields rose almost a third of a percentage point to as high as 1.195 percent, the most since June 22, in the weeks following Ozawa’s Aug. 26 announcement that he would challenge Kan.

Ozawa, 68, has proposed 2 trillion yen in stimulus, raising concern he’d add to a debt burden already approaching 200 percent of gross domestic product.

“If Kan won the race, it may trigger the buying back of bonds, which have been sold on uncertainties over policy,” said Kazuya Ito, a fund manager in Tokyo at Daiwa SB Investments Ltd.

Ozawa has the support of a little more than 190 of his party’s 411 members of parliament compared with just below that number for Kan and 30 undecided, the Mainichi newspaper said yesterday, citing its own poll. Their votes carry twice as much weight as those cast by regional DPJ members in the ballot.

Global Data

Benchmark 10-yields earlier climbed toward this month’s high before data that economists said will show U.S. retail sales increased and U.K. consumer confidence rebounded.

Sales at U.S. retailers rose 0.3 percent in August and the Federal Reserve Bank of New York’s general economic index gained to 8 in September from 7.1 the previous month, according to separate Bloomberg News surveys before data scheduled for Sept. 14 and 15. An index of U.K consumer sentiment climbed to 60 in August from 56 in the previous month, another Bloomberg survey before tomorrow’s data from Nationwide Building Society.

“Concerns about a double-dip recession at home and abroad were overdone,” said Kazuto Uchida, chief economist at Bank of Tokyo Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan’s largest bank. “Yields need to climb from unsustainable levels.”

China’s Economy

Bonds also fell after China reported industrial production grew in August at a faster pace than economists estimated.

China’s output gained 13.9 percent from a year earlier, the National Bureau of Statistics said on Sept. 11, showing the economy is maintaining momentum even as the government clamps down on property speculation, shutters energy-intensive factories and limits lending. Economists expected a 13 percent increased, based on a Bloomberg News survey.

Losses in Japan’s bonds were tempered on speculation yields near the highest level this month will attract investors.

“Buying of 10-year bonds from Japan’s institutional investors is likely to grow stronger as yields come closer toward the 1.2 percent level,” said Shinichi Horikawa, who helps to manage the equivalent of $11 billion at Mitsui Sumitomo Kirameki Life Insurance Co. in Tokyo.

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