Japanese govt bonds close mostly higher on late institutional investor buying

Japanese govt bonds close mostly higher on late institutional investor buying

	Published : Thu, 22 Mar 2007 09:07 By : Agencies Print this Story

TOKYO (XFN-ASIA) - Japanese government bond prices closed the day mostly higher as late buying by institutional investors reversed the softer trend seen earlier in the day, dealers said.

The yield on the benchmark 10-year bond closed at 1.550 pct, down from 1.560 pct at Tuesday's close.

Financial markets here were closed yesterday due to a public holiday.

The yield on the two-year note was at 0.785 pct, unchanged from Tuesday, while the yield on the lead five-year note eased to 1.125 pct from 1.135 pct.

The yield on the bellwether 20-year bond was at 2.035 pct, up from 2.030 pct, while the yield on the 30-year bond dropped 2.035 pct from 2.260 pct.

Bond prices move inversely to yields.

The price of the 10-year bond futures contract rallied to 134.90 yen from 134.81 yen in late trading

Tuesday.

Dealers said many participants stayed on the sidelines, still digesting the message from last night's Federal Open Market Committee statement, while others were waiting for the release later today of the annual survey on land prices.

The outcome of the survey is widely expected to show the first rise in 16 years for nationwide land prices, which would be the strongest evidence yet that Japan has clearly emerged from deflation.

In its statement accompanying the decision to leave short-term interest rates unchanged at 5.25 pct, the Federal Reserve did not refer to the possibility of 'additional firming' of rates as it did in January.

The Fed said 'future policy adjustments' will depend on inflation and growth -- more neutral language that the market interpreted as opening the way for a possible rate cut -- although it indicated that it remains vigilant about the threat of inflation.

'Expectations for a possible rate cut in the US can also weaken the view in the market for further rate increases in Japan,' Lehman Brothers strategist Makoto Yamashita said.

'On the other hand, if the market comes to conclude that a rate cut can minimize the risk of a hard-landing of the US economy, such a view can also fuel a stronger momentum for the stock market, thereby limiting declines in the yields (of bonds),' he said.

Commenting on the upcoming survey on land prices, NLI Research Institute senior economist Taro Saito said if the result 'confirms a bottoming out of the prolonged downtrend, it will prompt the Bank of Japan to consider continuing to hike interest rates.'

JP Morgan Securities chief economist Masaaki Kanno also warned of underlying risks for a possible inflation build-up while stressing the need to adjust interest rates gradually.

'It is premature to judge that rises in land prices indicate clear signs of a recurrence of the asset price bubble here, but it is certain that the longer interest rates are left at exceptionally low levels, the bigger the risk of inflation will become,' Kanno said.

'In this regard, there seems to be no urgent need to speed up the pace of interest rate hikes here in Japan, especially at a time when there is uncertainty over the global economy's prospects,' he said.

Kanno however said that once this uncertainty is removed, the BoJ may need to reconsider the pace of its rate hikes.

(1 usd = 117.40 yen)

yasuhiko.seki@xfn.com