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Japan Bonds Jump as Kan Election Victory Eases Spending Concerns

Sept. 14 (Bloomberg) -- Japan’s bonds jumped, sending yields down by the most in a week, as Prime Minister Naoto Kan’s victory in a party leadership election relieved concern a new government would scrap fiscal reforms.

Bonds were also supported as an auction of 20-year debt showed the strongest demand in three months. Longer-maturity bonds fell earlier in the day amid concern debt issuance would increase under a government led by Kan’s rival Ichiro Ozawa.

"Kan’s re-election will likely bring a sense of ease over Japan’s fiscal problem, prompting demand for bonds," said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. "Still, Kan will continue to face a divided parliament and there won’t be big changes to the political situation."

The yield on the benchmark 10-year bond declined four basis points to 1.105 percent at 5:15 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1 percent security due September 2020 rose 0.355 yen to 99.054 yen. The yield dropped as much as five basis points on Sept. 7. A basis point is 0.01 percentage point.

Yields on 20-year debt dipped half a basis point to 1.93 percent. Ten-year bond futures for December delivery gained 0.10 to 141.38 at the 3 p.m. close of the Tokyo Stock Exchange.

The ruling Democratic Party of Japan chose Kan over Ozawa in a membership election by a margin of 721-491. The winner of today’s contest is assured of being prime minister because the DPJ controls the lower house.

Yen’s Gains

The DPJ lost an upper-house election in July after Kan said he will consider doubling the nation’s sales tax to tackle the world’s largest public debt. Ozawa, who heads the DPJ’s largest faction, has said the government may have to issue more bonds for spending measures to boost the economy. He’s also advocated intervention to curb gains in the yen.

The yen strengthened to a 15-year high of 83.09 per dollar as Ozawa’s defeat was announced. A stronger yen reduces the value of overseas sales at Japanese companies when repatriated.

“If the yen continues to appreciate, it will drive down Japanese shares and boost demand for bonds,” said Shinji Hiramatsu, who helps oversee the equivalent of $1.7 billion as senior investment manager at Sompo Japan Asset Management Ltd. in Tokyo.

Twenty-year yields erased an earlier gain of four basis points after the bid-to-cover ratio of today’s auction climbed to 4.56, the highest since a June 16 sale.

“Twenty-year yields at around 2 percent aren’t bad for bargain hunting,” said RuiXue Xu, a strategist in Tokyo at RBS Securities Japan Ltd., a unit of Royal Bank of Scotland Group Plc.

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

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

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