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Japan’s Bonds Decline, Snapping Five-Day Advance, on Weaker Yen

Japan’s bonds declined, snapping a five-day gain, as the yen fell against the dollar, easing concern a stronger currency will hurt exporters’ earnings.

Bonds also dropped on speculation yields at a one-month low deterred investors from buying them. Prime Minister Naoto Kan said today the administration’s next stimulus plan to rebuild from last month’s earthquake and tsunami will likely require issuing government bonds. The Ministry of Finance will sell 2.6 trillion yen ($31.7 billion) of two-year debt tomorrow.

“Ten-year yields won’t likely dip below 1.2 percent unless we see new factors,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest bank. “The market is thin before several events toward the weekend.”

The benchmark 10-year yield rose 1.5 basis points to 1.225 percent as of 3:05 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2021 decreased 0.134 yen to 100.661 yen.

The yield touched 1.210 percent on April 22, the lowest since March 25. A basis point is 0.01 percentage point.

Ten-year bond futures for June delivery slid 0.12 to 139.63 at the 3 p.m. close of the Tokyo Stock Exchange.

The yen weakened to as low as 82.43 per dollar, after reaching 81.62 on April 21, the strongest since March 29.

Local Elections

The ruling Democratic Party of Japan lost a parliamentary seat in a by-election, the latest blow to Kan as pressure mounts over his handling of last month’s disaster.

Kan’s party also lost five seats and won three in 10 head-to-head contests with the Liberal Democratic Party in municipal mayoral races yesterday, Kyodo News reported. A third party won one race and another result wasn’t yet known, Kyodo said.

The prime minister, who this week will submit a 4 trillion yen rebuilding package to the Diet, lacks a two-thirds majority in the lower house needed to override any veto from the opposition-controlled upper chamber. The LDP hasn’t said whether it will support the plan.

Japan’s prior two-year sale on March 24 drew bids worth 4.8 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.7 at the February offering.

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.

Retail Sales

Losses in bonds were limited before a report on April 27 forecast to show retail sales dropped last month, adding to the case for the Bank of Japan to maintain monetary stimulus this week to help quake rebuilding efforts.

Retail sales dropped 6.1 percent in March from a year earlier after rising 0.1 percent in February, according to the median estimate of economists in a Bloomberg News survey before the government data.

The Bank of Japan may cut its forecast for real growth for fiscal 2011 to 0.8 percent from 1.6 percent as a result of the March 11 earthquake, the Nikkei newspaper reported today.

The central bank will keep its benchmark interest rate at a range between zero and 0.1 percent at its next meeting on April 28, according to all of 13 economists surveyed by Bloomberg News.

“The market will continue to expect the BOJ to consider further easing as the bank lowers its economic outlook over the next several months,” Akito Fukunaga, the chief rates strategist at the brokerage unit of Royal Bank of Scotland Plc, wrote in a report today. “The yield curve should flatten gradually, given strong demand for long-term debt.”

Japan’s government bonds have handed investors a 0.2 percent return this month, compared with a loss of 0.4 percent this year, according to an index compiled by Merrill Lynch & Co.

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