By Theresa Barraclough Oct. 8 (Bloomberg) -- Japanese government bonds rose for a second day this week after the Nikkei 225 Stock Average slumped on concern global economic growth will slow, encouraging investors to buy fixed-income assets. Ten-year bond futures gained to the highest in three weeks after the International Monetary Fund said the world economy is headed for a recession next year. Benchmark 10-year yields fell toward the lowest since April before a government report tomorrow that is estimated by economists to show machinery orders declined for the third consecutive month in August. ``Futures are reacting to stocks,'' said Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co., one of the 24 primary dealers that are required to bid at auctions, in Tokyo. ``Generally, it's a bond friendly environment.'' The yield on the 1.5 percent bond due September 2018 fell 3.5 basis points to 1.4 percent as of 12:39 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.307 yen to 100.872 yen. Ten-year bond futures for December delivery climbed 1.05 to 139.35 at the Tokyo Stock Exchange. The contracts earlier reached 139.82, the highest since Sept. 16. Shares tumbled across the Asia-Pacific region today, extending a global sell-off that's wiped out more than $5 trillion of market value in the past week. The Nikkei 225 lost 4.7 percent to 9,675.48, falling below 10,000 for a second consecutive day. `Major Downturn' ``The global economy is entering a major downturn,'' the IMF said in a staff report, dated Oct. 4 and obtained by Bloomberg News. ``Many advanced economies are now close to recession, while emerging economies are also slowing rapidly.'' Japan's economy shrank 3 percent in the three months ended June 30, the steepest contraction since 2001, the Cabinet Office said last month. Equipment orders, which signal capital spending in the next three to six months, fell 2.8 percent from July when they slid 3.9 percent, according to the median estimate of 33 economists surveyed by Bloomberg News. ``There's a flight to quality bid,'' said Shinichi Horikawa, who helps oversee the equivalent of $15.4 billion in yen bonds at Sumitomo Mitsui Asset Management Co. in Tokyo. The Bank of Japan added 2.1 trillion yen ($20.7 billion) to the financial system as global subprime mortgage-related losses force banks to restrict credit. Liquidity Operations Japan's overnight call loan rate traded at 0.515 percent after today's second operation, from 0.55 percent before the injection, according to Tokyo Tanshi Co. The BOJ has pumped about 23 trillion yen into the financial system over the past three weeks, the most in at least six years, as other central banks step up efforts to revive lending. Demand for shorter-dated securities may be limited after BOJ Governor Masaaki Shirakawa yesterday downplayed speculation that the central bank may cut rates in concert with its overseas counterparts. Two-year yields, which are sensitive to changes in interest rates expectations, rose 2 basis points to 0.73 percent. The yield is 23 basis points above the overnight lending rate. ``It's appropriate for each nation to make a judgment based on its own economy and prices,'' Shirakawa said at a press conference in Tokyo yesterday after his board left the key interest rate at 0.5 percent. Any coordinated action that doesn't reflect this would be ``undesirable,'' he said. There is a 26 percent chance Japan's central bank will reduce its target rate to 0.25 percent from 0.5 percent by year- end, according to calculations by JPMorgan Chase & Co. using overnight swaps. The odds were 34 percent on Oct. 6. Auction Cancellation The Ministry of Finance yesterday said it will cancel the planned sale of 10-year inflation-linked debt today, citing lack of demand. The difference in yield on the notes and regular debt more than doubled in the past week to minus 96 basis points as investors sold the securities to cover credit-market losses. Yields on the linked notes exceed those on conventional debt by the most since the securities were introduced in March 2004. They averaged 45 basis points less last year, according to data compiled by Bloomberg News. The securities typically yield less than regular bonds because their principal payments increase at the same rate as inflation. The gap in yields of the two securities, known as the breakeven rate, reflects traders' inflation expectations over the term of the debt. The decision came just a week after the ministry said it would limit issuance of the securities to 300 billion yen ($3 billion) from 500 billion yen due to insufficient demand. The ministry reduced the amount after brokerages and investors recommended the ministry issue less of the debt. The ministry plans to maintain its planned December and February auctions of 500 billion yen each ``for now,'' although it will discuss with market participants what to do about the remaining sales, said Junichi Nakajima, director of the market finance division at the ministry's financial bureau. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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