Japan’s Bonds Rise Most This Year on Kan Victory, Intervention

Sept. 18 (Bloomberg) -- Japanese bonds completed the biggest weekly advance in 10 months as concern eased that a new government would increase debt sales and amid speculation funds created by currency intervention would flow into debt securities.

Benchmark 10-year yields touched a two-week low after Prime Minister Naoto Kan was re-elected as the head of the ruling party by defeating rival Ichiro Ozawa, who had advocated increased government spending. The Bank of Japan refrained from removing funds in the financial system after selling yen for the first time since 2004, leaving deposits held by institutions there at the highest level this month.

“Kan’s re-election will likely bring a sense of ease over Japan’s fiscal problem, prompting demand for bonds,” said Yasunari Ueno, chief market economist at Tokyo-based Mizuho Securities Co., a unit of Japan’s second-largest bank.

The yield on the benchmark 10-year security dropped eight basis points to 1.07 percent in Tokyo in the five days ended Sept. 17, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. That’s the biggest weekly slide since the period ended Nov. 13. The 1 percent bond due in September 2020 added 0.713 yen to 99.368 yen.

Ten-year bond futures for December delivery rose 0.89 to 142.12 at the Tokyo Stock Exchange.

Kan retained his job after defeating Ozawa, a former secretary general of the ruling Democratic Party of Japan. Ozawa, who heads the DPJ’s largest faction, had said the government may have to issue more bonds for spending measures to boost the economy.

Okada Appointment

Katsuya Okada, a former foreign minister, was named the DPJ’s new secretary-general, the No. 2 spot in the party.

“Okada is distant from Ozawa, and his appointment signifies Ozawa’s dissipating influence over the ruling party,” Shinji Nomura, chief debt strategist at Tokyo-based Nikko Cordial Securities Inc., wrote in a report. “That has reduced concern even further that bonds will fall.”

Japan unilaterally sold the yen on Sept. 15 after it climbed to a 15-year high of 82.88 per dollar. BOJ board member Tadao Noda said the central bank will use intervention funds to provide liquidity.

“Unsterilized intervention increases money in the market, so it’s effectively monetary easing,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees about $65 billion. “With more money flowing into the market, both bonds and stocks typically go up.”

Sterilization refers to a situation where central banks seek to neutralize the impact of currency sales by draining funds from the market through bill auctions.