Japanese Government Bonds Rise on Speculation Rates to Stay Low

Feb. 13 (Bloomberg) -- Japan’s 10-year bonds completed a weekly gain on speculation chronic deflation will encourage the Bank of Japan to keep its benchmark interest rate near zero when policy makers meet next week.

Benchmarkyields stayed near the lowest level in two weeks before a report on Feb. 15 that economists said will show prices fell at a faster pace in the final quarter of 2009 even as economic growth quickened. Bond futures dropped yesterday as stocks advanced for second day after European Union leaders pledged to help Greece tackle it swelling budget deficit.

“A quickening expansion won’t dispel strong deflationary pressure immediately,” said Takeshi Minami, chief economist at Norinchukin Research Institute Ltd. in Tokyo. “The Bank of Japan is still far away from exiting credit easing, which will continue to support the debt market.”

Ten-year yields fell 2.5 basis points this week to 1.33 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. They slid to 1.325 percent on Feb. 10, the lowest level since Feb. 1.

Benchmark yields rose half a basis point yesterday and 10- year bond futures for March delivery slipped 0.06 to 139.37 at the close of the Tokyo Stock Exchange.

The gross domestic product deflator declined 2.3 percent in the fourth quarter from a year earlier, according to a Bloomberg News survey. The deflator is used to calculate real GDP, or economic growth adjusted for price changes.

The economy grew an annual 3.5 percent last quarter, after expanding 1.3 percent in prior three months, according to a separate Bloomberg survey.

‘Stave off’ Recession

“Japan may be able to stave off a double-dip recession,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “Still, it’s questionable whether a recovery in domestic demand without stimulus is possible. The economy is still highly dependent on overseas demand, underscoring the fragility of the recovery.”

The Bank of Japan will keep its overnight call rate at 0.1 percent throughout 2010, according to Bloomberg News survey. BOJ Governor Masaaki Shirakawa and fellow board members will start a two-day policy meeting on Feb. 17.

Central bank board members this month affirmed their forecasts for Japan’s economy to keep expanding while consumer prices will fall through the year ending March 2012, a third- year of declines.

Stocks Bounce

Bond futures snapped a four-day gain yesterday as Asian stocks extended a worldwide equity rally, limiting demand for the relative safety of government debt.

“Easing concerns over Greece support demand for riskier securities,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest banking group. “The recent trend of buying flight-to-safety assets will weaken.”

The Nikkei 225 Stock Average advanced 1.3 percent yesterday. Benchmark 10-year yields had a correlation of 0.6 with the Nikkei 225 this month, according to Bloomberg data. A value of 1 would mean the two moved in lockstep.

European leaders promised “determined” action to staunch the worst crisis in the euro’s 11-year history. The agreement reached on Feb. 11 called for closer monitoring of the Greek economy and stopped short of offering concrete steps to help Greece handle a debt load exceeding annual economic output.

“It’s a political message that we wanted to send out,” European Union President Herman Van Rompuy told reporters in Brussels on Feb. 11. “The Greek government will take the responsibility for cleaning up its public finances.”