Japan’s Bond Futures Advance on Rising Yen, Declining Stocks

Jan. 23 (Bloomberg) -- Japan’s 10-year bond futures rose for a second week as the yen’s gain to a one-month high versus the dollar damped the outlook for exporter earnings, boosting demand for the safety of government debt.

Ten-year yields fell the most in a week yesterday after U.S. President Barack Obama on Jan. 21 proposed limiting risk-taking at banks to avoid a repetition of the global financial crisis. Bonds also advanced as Japanese stocks yesterday fell the most in two months, with the Nikkei 225 Stock Average erasing almost all of this year’s advance.

“Obama’s remarks will continue to weigh on stocks until details of his proposal become clear,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest banking group. “External factors are positive for Japan’s bonds.”

Ten-year bond futures for March delivery gained 0.13 to 139.23 this week at the Tokyo Stock Exchange.

The yield on the 1.3 percent bond maturing in December 2019 rose half a basis point to 1.325 percent this week in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.043 yen to 99.781 yen. The yield dropped 1.5 basis points yesterday, the sharpest decline since Jan. 15.

Five-year yields declined half a basis point to 0.505 percent this week.

The yen climbed to as high as 89.79 per dollar yesterday, the strongest since Dec. 18, after Obama on Jan. 21 called for limiting the size and trading activities of financial institutions to reduce risk taking. The Nikkei 225 yesterday fell 2.6 percent, the largest decline since Nov. 27.

‘Will Struggle’

“Ten-year yields will struggle to dip below 1.30 percent unless expectations re-emerge that the Bank of Japan will introduce additional monetary easing or new factors come up for Japan bonds,” Shinji Nomura, a Tokyo-based chief bond strategist at Nikko Cordial Securities Inc., wrote in a research note yesterday.

The Bank of Japan introduced a 10 trillion yen ($111 billion) credit program in December after the yen rose to a 14-year high against the dollar and Finance Minister Naoto Kan urged policy makers to ease monetary policy to arrest deflation when he was economy minister. There are “still various policy measures that could be taken” by the central bank and the government, Kan said Jan. 14.

Bank of Japan

“The yen’s latest advance is not big or rapid enough to put pressure on the BOJ,” said Eishi Yokoyama, a Tokyo-based fund manager at Daiwa SB Investments Ltd. “Investors have already taken deflation into account. Japan’s bonds will continue to be sensitive to U.S. factors for a while.”

The central bank will keep its key overnight rate at 0.1 percent on Jan. 26, according to all 17 economists surveyed by Bloomberg News. A separate survey indicates the central bank will leave the rate unchanged all year.

Consumer prices excluding fresh food fell 1.3 percent in December from a year earlier, according to the median estimate of economists in a Bloomberg News survey before the statistics bureau releases the data on Jan. 29 in Tokyo. That would be a 10th-straight decline. Deflation, a general drop in prices, enhances the value of the fixed payments from bonds.

The extra yield offered by 10-year Treasuries over similar-maturity Japanese bonds was 2.28 percentage points yesterday. The spread reached 2.54 percentage points on Dec. 31, the most in two years.