Japan Bonds Rise on Kan’s Debt Reduction Plan, Global Slowdown

June 19 (Bloomberg) -- Japan’s 10-year bonds completed a second weekly gain after Prime Minister Naoto Kan vowed to reduce the world’s largest public debt and said he will consider increasing the consumption tax.

Benchmark bonds rose for a second day yesterday before reports next week economists said will show German business confidence declined and U.S. new home sales dropped, signaling the global economic recovery is losing momentum. Ten-year yields fell to the lowest in a week as credit-default swaps for Japanese government bonds dropped for a second week.

“The fiscal consolidation plan helped soothe the anxiety about swelling debt,” said Yuichi Kodama, chief economist in Tokyo at Meiji Yasuda Life Insurance Co., Japan’s third-largest life insurer. “Kan’s stance marked a clear contrast to his predecessor who pushed for a big spending policy.”

The yield on the 10-year bond dropped three basis points this week to 1.20 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due June 2020 rose 0.269 yen to 100.892 yen. The yield dropped to 1.195 percent yesterday, the lowest since June 10.

Ten-year bond futures for September delivery climbed 0.27 this week to 140.61 on the Tokyo Stock Exchange.

‘Rehabilitate’ Finances

“Unless we work on fiscal rehabilitation, an international organization such as the International Monetary Fund could control our fiscal management,” Kan said on June 17. “We must rehabilitate our finances with our own power without relying on other countries.”

The prime minister said he would consider the opposition Liberal Democratic Party’s proposal to raise the consumption tax to 10 percent. The earliest Japan could increase the tax would be the fall of 2012, DPJ Policy Chief Koichiro Genba said on June 17.

“If a tax increase was implemented before Japan can regain the economic strength to achieve autonomous recovery, it would pose serious risks to the economy,” said Seiji Shiraishi, chief economist for Japan at HSBC Holdings Plc. in Tokyo. “The tax plan will support the debt market not only from a viewpoint of supply and demand conditions but also from the economic fundamentals perspective.”

Japan’s government also pledged to cut taxes on businesses and nurture the environment and health care industries as part of plans to defeat deflation and end two decades of stagnation.

Corporate Tax Cut

The government pledged in its medium-term economic plan yesterday to bring the corporate tax rate down to a level “commensurate” with other leading nations. That rate is “about 25 percent,” Yosuke Kondo, parliamentary secretary for the Trade Ministry, said. Firms in Tokyo pay a levy, including local taxes, of 40.7 percent.

Japan’s bonds also rose on speculation Europe’s lingering debt crisis is slowing the global recovery, boosting demand for the safety of debt.

The Ifo institute’s German business climate index fell to 101.1 in June from 101.5 the previous month, according to a Bloomberg survey before the June 22 report. Purchases of new U.S. homes slid 14.6 percent in May, according to a separate survey before a June 23 release.

“The slew of economic data is beginning to show signs of a slowdown, weighing on risk sentiment,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest banking group. “Bonds may continue to fare well.”

The cost to protect Japanese government debt from default fell six basis points this week to 89.775, according to prices from CMA DataVision.

‘Risk Premium’

“The risk premium investors demand to hold Japanese debt is likely to decline” on news of the government’s financial plans, said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. “The market had not prepared for an early increase in the consumption-tax rate.”

Credit-default swap indexes are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.