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Japan Bond Futures Advance on Yen, Stocks, Cabinet Reshuffle

Japan’s bond futures rose on speculation a strengthening yen will damp the earnings outlook for exporters and boost demand for safer assets.

Bond futures touched a one-week high yesterday after Treasuries advanced and Japan’s stocks declined. Japanese Prime Minister Naoto Kan picked former Finance Minister Kaoru Yosano to join his reshuffled Cabinet, bringing in a proponent of raising the sales tax to cope with increasing social welfare costs and public debt. Gains in bonds were limited on speculation investors cut their debt holdings before two auctions next week.

“As bonds stabilize overseas, investors find it easy to buy Japan’s debt,” said Satoshi Yamada, who helps oversee about $11 billion as manager of fixed-income trading at Okasan Asset Management Co. in Tokyo. “Yosano’s appointment shows the government’s resolve to tackle fiscal challenges seriously.”

Ten-year bond futures for March delivery gained 0.34 to 140.05 at the Tokyo Stock Exchange this week. The contracts touched 140.34 yesterday, the highest since Jan. 5.

The yield on the 1.2 percent bond due December 2020 fell half a basis point to 1.195 percent this week as of 4:16 p.m. yesterday in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. A basis point is 0.01 percentage point. The price rose 0.044 yen to 100.044 yen.

The yen touched 82.49 per dollar yesterday, the strongest since Jan. 5. The Nikkei 225 Stock Average fell 0.9 percent yesterday. Treasury 10-year yields declined seven basis points to 3.3 percent on Jan. 13.

Tax Debate

Kan is gearing up for a national debate on raising the 5 percent consumption tax. Yosano was named economy and fiscal policy minister. Finance Minister Yoshihiko Noda kept his post.

Yosano supported increasing the sales levy in his failed 2008 race for the leadership of the Liberal Democratic Party, which he left last year.

“Yosano will press for fiscal rehabilitation rather than waiting for economic growth,” said Akio Kato, Tokyo-based team leader for Japanese debt at Kokusai Asset Management Co., which runs the $34.3 billion Global Sovereign Open fund. “He will be a good addition to Kan’s Cabinet.”

The Ministry of Finance sells 2.4 trillion yen ($29 billion) of five-year notes on Jan. 18 and 1.1 trillion yen of 20-year securities on Jan. 20.

“We are seeing position adjustment before the auctions,” said Satoshi Yamada, chief quantitative analyst in Tokyo at Nikko Cordial Securities Inc. “It seems people want to keep 20-year yields up above 2 percent, which should lead to good results at the sale.”

Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors.

Five-year yields gained 2.5 basis points to 0.485 percent this week, and 20-year yields rose 6.5 basis points to 2.01 percent.

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