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Japan’s Bond Futures Advance on Yen’s Gain, Deflation Prospects

Japan’s 10-year bond futures rose for a second day on speculation the yen’s strength will accelerate a decline in domestic prices and prompt the central bank to ease monetary policy further.

The benchmark 10-year yield traded near a seven-year low after Kyodo News said on Oct. 10 the Bank of Japan will reduce its estimate for consumer prices. The BOJ may quadruple its asset-purchase program to 20 trillion yen ($244 billion) to cope with a deteriorating economy and a stronger yen, Goldman Sachs Group Inc. said today.

“The yen will remain strong and concern that the economy is worsening is persistent, so investors continue to expect further easing by the central bank,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. “Money is more likely to flow into the bond market.”

Ten-year bond futures for December delivery advanced 0.11 to 144.06 at the 3 p.m. close of the Tokyo Stock Exchange. Japan’s markets were closed yesterday for a national holiday.

The yield on the benchmark 10-year bond dipped half a basis point to 0.85 percent as of 3:22 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 0.8 percent security due September 2020 rose 0.046 yen to 99.542.

The yield sank to 0.82 percent on Oct. 6, a level not seen since July 1, 2003. A basis point is 0.01 percentage point.

The Bank of Japan will forecast that the nation’s consumer price index excluding fresh food may fall or remain unchanged in fiscal 2011, Kyodo said. That compares with a 0.1 percent increase the BOJ estimated in July, Kyodo said.

BOJ Purchases

Consumer prices excluding fresh food dropped for an 18th month in August, a government report showed on Oct. 1. Deflation, a general drop in prices, enhances the purchasing power of the fixed payments from debt.

A gauge for Japanese household sentiment slid for a third month in September, the Cabinet Office said today.

“Demand for consumer goods and services remains weak,” Norinchukin’s Minami said. “We can’t expect wages to rise and boost demand.”

The BOJ on Oct. 5 cut its key interest rate to a range of zero to 0.1 percent and announced the creation of a 5 trillion yen fund to buy government and corporate debt, exchange-traded funds and real-estate investment trusts.

“We envisage the new asset-buying fund being expanded three times, by 5 trillion each time, resulting in 20 trillion yen in asset purchases by the end of 2011,” Chiwoong Lee, senior economist at Goldman Sachs in Tokyo, wrote in a report dated today.

Stock Slump

The yen appreciated to 81.39 per dollar yesterday, the strongest since April 1995. Japan sold the yen to weaken it on Sept. 15 for the first time since 2004 after the currency reached 82.88 versus the greenback.

The Nikkei 225 Stock Average slid- 2.1 percent today, the most since Sept. 8. A stronger yen reduces the value of overseas sales at Japanese companies when repatriated.

Dai-ichi Life Insurance Co. plans to boost its yen-denominated bond holdings and reduce investment in Japanese stocks in the second half of the fiscal year, Akifumi Kai, a manager in the investment planning division, said in an interview today. The company plans to mainly invest in Japanese government bonds with terms of 20 years and longer, he said.

Dai-ichi Life is Japan’s second-largest life insurer with about 30 trillion yen in assets.

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