Japanese Bonds Little Changed as Deflation Concerns Buoy Demand

June 22 (Bloomberg) -- Japanese government bonds were little changed as the steepest decline in U.S. consumer prices in six decades added to speculation that deflation will return to the world’s second-largest economy.

Benchmark 10-year yields traded near the lowest level in four weeks before a government report this week that economists said may show Japan’s consumer prices index fell for a third month. Gains in bonds may be limited after a survey showed Japanese manufacturers became less pessimistic this quarter amid signs the country’s worst postwar recession is easing.

“Incoming economic data, including CPI, will underscore a slow-paced improvement of the Japanese economy,” said Hirokata Kusaba, senior economist in Tokyo at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. “Yields will fall.”

The yield on the benchmark 10-year bond rose half a basis point to 1.45 percent as of the 11:05 a.m. morning close in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield reached 1.44 percent on June 19, the lowest since May 26. The price of the securities fell 0.044 to 100.436. A basis point is 0.01 percentage point.

Ten-year bond futures for September delivery rose 0.12 to 137.04 at the Tokyo Stock Exchange. Futures contracts for 10- year bonds advanced for a seventh day, the longest stretch in six months, before this week’s inflation report.

Consumer prices excluding fresh food probably dropped 1 percent in May from a year earlier following a 0.1 percent from a year earlier, according to Bloomberg News survey of economists before the statistics bureau releases the data on June 26.

U.S. Rally

Bank of Japan Governor Masaaki Shirakawa said in May that price declines will accelerate through the middle of the financial year ending in March 2010 as demand slackens and crude oil trades below last year’s record high.

Demand for fixed-income securities may also increase after U.S. 30-year yields posted the biggest weekly drop in a month.

Yields of U.S. 30-year debt fell 14 basis points last week to 4.50 percent, according to BGCantor Market Data. It was the biggest weekly drop since the five days ended May 15.

“Market sentiment is improving, as evident by the drop of U.S. yields,” said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd. “There is also the emerging view that Japanese 10-year yields have already peaked out at 1.56 percent on June 11. Bonds will be firm.”

Sentiment Survey

Gains were limited after a joint survey by the Cabinet Office and Finance Ministry showed today sentiment among Japanese manufacturers rose to minus 13.2 points this quarter compared with minus 66 three months earlier. A negative number means pessimists outnumber optimists.

“Today’s sentiment survey clearly showed confidence has already started to recover,” said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s biggest bank. “If we begin to see an improvement in economic data that track the actual development of the economy, such as industrial production, yields may rise.”

The Tankan index of sentiment among large manufacturers improved to minus 43 in June, from minus 58 in March, according to a Bloomberg survey of economists before the July 1 report.