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BLBG: Japan 10-Year Bonds Rise on Rate-Cut Speculation, Stock Losses
By Theresa Barraclough

Oct. 6 (Bloomberg) -- Japan's 10-year bonds advanced, pushing yields down to the lowest since April, as traders added to bets the Bank of Japan will reduce interest rates this year to ward off a recession.

The odds are now 34 percent for a rate cut by year-end from 3 percent a week ago, according to calculations by JPMorgan Chase & Co. using overnight swaps. The BOJ starts its two-day policy meeting today. All 31 economists surveyed by Bloomberg News expect policy makers to keep rates at 0.5 percent tomorrow. The Nikkei 225 Stock Average fell by the most in almost three weeks, boosting demand for debt.

``For the near term, the market will stay firm, speculating on the BOJ rate cut,'' said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., one of the 24 primary dealers required to bid at government auctions. ``The BOJ is likely to downgrade their economic outlook.''

The yield on the 1.5 percent bond due September 2018 fell 7 basis points to 1.375 percent as of 4:40 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.615 yen to 101.093 yen. The yield had reached 1.37 percent, the lowest level since April 18.

Ten-year bond futures for December delivery advanced 0.87 to 138.55 as of the afternoon close at the Tokyo Stock Exchange. A basis point is 0.01 percentage point.

The central bank added 1 trillion yen ($9.6 billion) to the financial system to help ease a global credit crunch. The BOJ should concentrate ``more on providing liquidity'' and continue to inject cash into markets, Ichikawa said.

Japan's overnight call loan rate traded at 0.48 percent after the operation at 9:20 a.m. in Tokyo, from 0.5 percent before the injection, according to Tokyo Tanshi Co.

Monthly Assessment

The BOJ will release its monthly report this week. Since the last assessment, government reports have shown industrial production fell at the fastest pace in five years in August, household spending dropped for a sixth month and the jobless rate reached a two-year high.

A separate central-bank survey last week showed sentiment among Japan's large manufacturers fell to the lowest in five years. Economic growth has been ``sluggish,'' the BOJ said in its September monthly report.

``The BOJ will probably change its policy stance from neutral to one that considers the economic situation,'' said Eiji Dohke, strategist at UBS Securities Japan Ltd. in Tokyo.

The Nikkei 225 lost 4.3 percent today after the Dow Jones Industrial Average dropped 1.5 percent on Oct. 3. Stocks slid after a U.S. government report showed that the nation lost the most jobs in five years in September. Payrolls fell by 159,000, more than anticipated, the Labor Department said on Oct. 3.

`Bearish Environment'

``The bond market is likely to test higher prices given the bearish environment for stocks,'' said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo.

Japan's benchmark bonds handed investors a return of about 1 percent in the three months ended Sept. 30, according to indexes compiled by Merrill Lynch & Co. The Nikkei 225, now trading at 10,473.09, lost 16 percent in the same period.

``The Nikkei may go down below 10,000,'' said Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co., another primary dealer in Tokyo. ``The sentiment for JGBs has been strong and there is a high possibility of 10-year yields falling to 1.35 percent this year.''

Should Onogi's predictions prove accurate, investors stand to make a return of 0.5 percent, according to Bloomberg calculations. Her forecasts are below a median forecast of 1.52 percent in a Bloomberg News survey of economists and analysts. The estimate puts a heavier weighting on more recent forecasts.

U.S. President George W. Bush last week signed into law a financial-rescue package intended to end banks' reluctance to lend. The financial-rescue package authorizes the government to buy troubled assets from financial institutions rocked by record home foreclosures. The legislation also includes $149 billion in tax breaks, a higher limit on federal bank-deposit insurance and a change in securities laws.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.