Japanese Bonds Pare Advance After Government Intervenes in Currency Market

Japan’s 10-year bonds pared earlier gains as stocks rallied after the nation intervened in the currency market for the first time since 2004.

Ten-year yields climbed from a two-week low as the Nikkei 225 Stock Average surged the most in seven weeks, damping demand for the relative safety of government debt. Bonds rose earlier after Moody’s Investors Service said Prime Minister Naoto Kan’s policy strategy supports the stable outlook on Japan’s debt ratings. Kan defeated Ichiro Ozawa in the ruling party’s leadership election yesterday.

“The currency intervention prompted investors to take profit, weighing on the bond market,” said Kazuya Ito, a fund manager at Daiwa SB Investments Ltd. in Tokyo. “The size of the intervention hasn’t become clear, and there may be a sell-off of the dollar again to test the authorities’ resolve. So, people can’t continue to sell bonds.”

The yield of the benchmark 10-year bond fell 4.5 basis points to 1.06 percent as of 1:38 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1 percent security due September 2020 rose 0.403 yen to 99.457 yen. The yield earlier dropped as much as 6.5 basis points.

Ten-year bond futures for December delivery gained 0.55 to 141.85 on the Tokyo Stock Exchange. The Nikkei 225 gained 2.5 percent, the most since July 28.

The yen weakened to as low as 85.09 per dollar today after earlier appreciating to 82.88, the strongest since May 1995. A stronger yen reduces the value of overseas sales at Japanese companies when repatriated.

Finance Minister Yoshihiko Noda confirmed the intervention and told reporters in Tokyo the move was unilateral. Chief Cabinet Secretary Yoshito Sengoku said the ministry considers 82 per dollar to be the line of defense.

Kan’s Victory

Bonds still gained for the day on speculation Kan’s victory over Ozawa yesterday will allow him to implement measures to trim the nation’s debt levels.

Kan, a former finance minister, has said he will consider doubling the sales tax to tackle the world’s largest public debt. He vows to end Japan’s prolonged struggle with deflation.

Thomas Byrne, senior vice president at Moody’s, said in an e-mail that Kan’s strategy supports the stable outlook on Japan’s Aa2 rating and the focus will be on whether he can follow through on and flesh out his fiscal plans.

Ten-year yields had gained more than 20 basis points since Ozawa expressed his intention on Aug. 26 to challenge Kan. Ozawa, who heads the DPJ’s largest faction, has said the government may have to issue more bonds for spending measures to boost the economy.

Breakeven Rate

The so-called breakeven rate shows investors’ projections for inflation were little changed even after Kan’s victory.

“Intervention alone can’t put the yen in a sustainable depreciation trend,” said Junichi Makino, a senior economist at Daiwa Institute of Research Ltd. in Tokyo. “It worked today, but it doesn’t guarantee it will be effective tomorrow. We can’t really expect effective measures from the government to turn around Japan’s economic stagnation and beat deflation.”

Traders see prices falling an average 0.98 percent over the next five years, as measured by the difference in yields between inflation-linked bonds and conventional debt. The so-called breakeven rate has been negative for at least a year.

The United Nations said in its annual Trade and Development report yesterday a continuation of the global expansionary fiscal stance is necessary to prevent a deflationary spiral. Deflation, a general drop in prices, enhances the purchasing power of the fixed payments from debt.

“It’s very difficult to maintain an economic recovery while restructuring a nation’s finances,” said Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd., which manages about $57 billion. “It’s desirable to take account of the risk” of a global deflationary spiral.