By Yoshiaki Nohara and Yumi Ikeda Dec. 3 (Bloomberg) -- Japan government bond yields may extend last month’s biggest drop this year as the Bank of Japan will ease monetary policy again after this week’s 10 trillion yen ($114 billion) measure, Kokusai Asset Management Co. said. “The BOJ can’t take a break yet,” said Akio Kato, leader of a seven-member team investing in Japanese bonds in Tokyo at Kokusai, which runs Global Sovereign Open fund, the world’s second-biggest managed debt fund. “Investors are beginning to expect the second and third actions.” Japan’s government bond markets already show such expectations, Kato said in an interview with Bloomberg News yesterday. The debt fund was worth 4.35 trillion yen ($49.6 billion) as of the end of October. Benchmark 10-year yields may fall to 1 percent around March, he said. Ten-year yields slid to 1.190 percent on Dec. 1, the lowest since Jan. 5, after the BOJ announced an emergency meeting, boosting speculation the central bank will add new monetary easing measures. The yields rebounded to as high as 1.255 percent on that day as the BOJ announced the facility to offer three-month loans to banks at 0.1 percent and stopped short of expanding its bond purchase program from 1.8 trillion yen per month. The 10-year yield fell to 1.235 percent today from 1.245 percent yesterday. Yesterday’s gains in yields were limited partly by speculation the BOJ will add more measures to combat deepening deflation, Kato said. “The meeting showed that if the government runs out of options and presses the BOJ, the bank will have to do something,” he said. “BOJ officials probably know this isn’t going to stem deflation. They didn’t want to put all the cards on the table at once and put themselves in a tough spot.” Government Pressure The new measure was introduced a month after the bank decided to end an earlier lending program that included unlimited collateralized loans to banks. The bank will accept a wider range of assets such as government bonds and debt issued by local governments. The program has no time limit. Prime Minister Yukio Hatoyama’s government will likely pressure the BOJ to take more aggressive moves as the yen’s gains against the dollar dim the economic outlook and threaten to worsen deflation by making imports cheaper, Kato said. Deflating Economy “The economy may fall into a second slump during the first half of next year,” he said. “Ten-year yields may touch 1 percent around March.” Consumer prices excluding fresh food declined for an eighth month in October, dropping 2.2 percent from a year earlier, the statistics bureau reported on Nov. 27. The yen climbed to 84.83 on Nov. 27, the strongest level since July 1995. Government officials including Deputy Prime Minister Naoto Kan praised the central bank’s Dec. 1 move. The government pushed the BOJ to tackle falling prices after declaring on Nov. 20 that Japan’s economy was in deflation. Political pressure on the BOJ will keep building, Kato said, as the Democratic Party of Japan-led government struggles to keep new bond sales next year at less than 44 trillion yen with falling tax revenue. That matches the amount former prime minister Taro Aso, who led the Liberal Democratic Party, budgeted for the current fiscal year ending March 2010. “The number, 44 trillion, is linked to the approval rate for the government and the market is paying due attention to the number,” he said. “Policy makers know that. They won’t lower the target soon.” To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Yumi Ikeda in Tokyo at Ikeda4@bloomberg.net

Source