By Yasuhiko Seki Jan. 28 (Bloomberg) -- Japanese five-year notes fell, ending a two-day advance, as Asian stocks rose and the yen weakened amid signs of the economic recovery is gathering momentum, sapping demand for the relative safety of debt. Benchmarkyields climbed from a three-week low before reports tomorrow forecast to show the U.S. economy accelerated in the final quarter of 2009 and Japan’s industrial production rose for a 10th month. Demand for government debt also fell on concerns the Federal Reserve will seek an early exit from stimulus measures after Kansas City Federal Reserve President Thomas Hoenig dissented from the central bank’s decision to keep interest rates at a record low for an “extended” period. “The economy is on the mend, as a whole, although its recovery path is still patchy,” said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank. “This may support the equity market and keep a lid on the debt market.” The yield on the five-year rose one basis point to 0.495 percent at 4:15 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.048 yen to 100.023 yen. The yield fell to 0.485 percent yesterday, the lowest level since Jan. 6. The yield on the 10-year bond increased half a basis point to 1.310 percent after reaching 1.305 percent yesterday, the lowest since Jan. 4. Ten-year bond futures for March delivery declined 0.07 to 139.51 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average rose 1.8 percent and the MSCI Asia Pacific Index of regional shares advanced 1.1 percent. The yen was 90.31 per dollar, after hitting a five-week high of 89.14 yesterday. Growth Quickens The U.S. economy grew at a 4.6 percent annual rate in the final quarter of last year, according to the median estimate of economists surveyed by Bloomberg News before tomorrow’s report. Japanese government data will show industrial production rose 2.5 percent in December, a separate Bloomberg survey indicated. Demand for debt also declined after Kyodo News Service reported that the issuance of new-financing government bonds may reach a record 55.3 trillion yen ($615 billion) in the year to March 2014, citing estimates from the Ministry of Finance. Standard & Poor’s this week lowered its outlook for Japan’s AA credit rating to “negative” from “stable,” saying Prime Minister Yukio Hatoyama lacks a plan to rein in the world’s largest debt burden. “We need to keep in mind the continued deterioration of the fiscal condition in Japan,” said Shinji Nomura, chief bond strategist at Nikko Cordial Securities Inc. in Tokyo. “This will weigh on the upside of the market.” Japan’s national debt may reach 973 trillion yen in the fiscal year ending March 2011, according to budget-related documents on the Finance Ministry’s Web site. Fed’s Rate Outlook Bonds also fell after U.S. policy makers, after concluding a two-day meeting in Washington, said they will cease buying mortgage-backed securities in March as planned and wind down other programs to add liquidity into the financial system. “The dissent came as a surprise and reignited speculation of an early exit,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., one of the 23 primary dealers that are required to bid at debt sales. “Bonds will weaken.” The decline in bonds was tempered on speculation the Bank of Japan will maintain its policy of keeping interest rates near zero even as the Fed moves toward raising borrowing costs. “Given the limited outlook that Japan will pull out of deflation soon, the BOJ won’t be able to start normalizing interest rates throughout the next year,” said Shinji Hiramatsu, senior investment manager at Sompo Japan Asset Management Ltd. in Tokyo. “This will continue to serve as a key driver in helping bond yields to stay low.” Consumer prices, excluding fresh food, dropped 1.3 percent in December from a year earlier, the 10th month of declines, according to a Bloomberg survey before tomorrow’s report. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net.

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