Japan Bonds Rise Fourth Day on BOJ Prospects, Stock Slide

Japanese government bonds rose for a fourth day as the yen’s rally dragged down local shares and amid prospects the central bank will increase debt purchases.

Two-year yields dropped to the lowest level since July 2005 before the Bank of Japan’s Jan. 21-22 meeting where it will adopt a 2 percent inflation goal advocated by Prime Minister Shinzo Abe, people familiar with the matter said. Ten-year rates slid to an almost one-month low, following a decline in rates for Treasuries as the debate in Washington over the U.S. debt ceiling increased the allure of refuge assets. Demand fell at a sale of five-year notes today.

“There is a good chance that the BOJ will cut interest rates on excess reserves and buy longer-dated debt under the asset-purchase program in the next six months,” supporting demand for bonds, said Makoto Yamashita, the chief Japan rates strategist in Tokyo at Deutsche Securities Inc.

The yield on the 10-year bond fell 2 1/2 basis points to 0.745 percent as of 5:09 p.m. in Tokyo, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield was the lowest since Dec. 18. The 0.8 percent security due December 2022 rose 0.232 yen to 100.508. The two-year rate dropped 1 1/2 basis points to 0.08 percent from Jan. 8, the previous day the notes traded.

Yields on 20- and 30-year debt declined to 1.725 percent and 1.955 percent, respectively, the lowest levels in three weeks. The five-year rate increased half a basis point to 0.16 percent. Japan’s Nikkei 225 Stock Average sank 2.6 percent, snapping a four-day gain, as the yen climbed against all its major counterparts.

BOJ Governor Masaaki Shirakawa said at a meeting of branch managers in Tokyo yesterday that the bank will pursue “powerful monetary easing.” At its last gathering in December, the BOJ increased its asset-purchase fund to 76 trillion yen ($862 billion) from 66 trillion yen.

Ishida Proposal

Also at the meeting, board member Koji Ishida proposed that the BOJ eliminate the 0.1 percent interest it pays to commercial banks on their excess reserves held at the central bank. The proposal was voted down by colleagues. Fellow board member Sayuri Shirai said reducing the rate could help to weaken the yen, according to the text of a speech dated today.

The central bank is set to adopt the 2 percent inflation target, doubling its existing goal of 1 percent, without setting a deadline for achieving it, people familiar with the discussions said.

U.S. government bonds held a three-day gain in Asian trading amid political wrangling in Washington on how to raise the debt ceiling and avoid a default. The U.S. Treasury Department has been using emergency measures since the end of December to prevent a breach of the $16.4 trillion limit.

A government auction in Japan of 2.3 trillion yen of five-year notes today attracted bids valued at 3.44 times the amount available, the weakest demand since September, according to Ministry of Finance data.

“Investors may become reluctant to buy JGBs further and push the five-year yield below 0.15 percent,” Deutsche’s Yamashita said ahead of the auction.

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