By Yasuhiko Seki Feb. 24 (Bloomberg) -- Japan’s 10-year bonds advanced for a second day as speculation that deflation will deepen boosted demand for government debt. Bond futures approached the highest level this year as stocks declined after a U.S. report yesterday showed confidence among consumers fell to a 10-month low. Consumer prices in Japan dropped for an 11th month in January, according to a Bloomberg News survey before the government reports the data this week. Deflation enhances the purchasing power of the fixed payments from bonds. “Given the huge slack in supply and demand conditions, Japan will be mired in deflation,” said Akitsugu Bandou, a senior economist at Okasan Securities Co. in Tokyo. “This will make it easier for investors to keep spending money on bonds.” The yield on the benchmark 10-year bond fell one basis point to 1.32 percent as of 4:15 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due December 2019 gained 0.087 yen to 99.826 yen. Ten-year bond futures for March delivery climbed 0.22 to 139.63 at the afternoon close on the Tokyo Stock Exchange. They advanced to 139.76 on Feb. 16, the highest since Dec. 30. The Nikkei 225 Stock Average declined 1.5 percent and the MSCI Asia Pacific index of shares slid 1.2 percent. The yen advanced to a one-week high of 89.92 per dollar yesterday as stock losses boosted demand for safer assets. ‘Positive for Bonds’ “If the yen rises back to a 14-year high and if the Nikkei 225 tumbles, the Bank of Japan won’t hesitate to step up credit easing,” said Tatsushi Shikano, a senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group. “Any additional easing is positive for bonds.” The Bank of Japan unveiled a 10 trillion yen ($110.8 billion) lending facility for commercial banks in December after the yen surged to 84.83 per dollar the previous month, the strongest since July 1995, and government ministers urged the central bank to do more to combat falling prices. A stronger yen pushes down the cost of imports, adding to deflation. Consumer prices excluding fresh food slid 1.3 percent in January from a year earlier, following a 1.3 percent drop the prior month, according to a Bloomberg survey before the statistics bureau releases the report on Feb. 26. BOJ members agreed unanimously to maintain “extremely low” rates, according to minutes of the central bank’s Jan. 25- 26 meeting released yesterday in Tokyo. Policy makers have kept their overnight lending rate at 0.1 percent since December 2008. BOJ’s Yamaguchi The Bank of Japan has limited room to ease policy with interest rates “effectively” at zero and a dearth of demand driving price declines, central bank Deputy Governor Hirohide Yamaguchi said in a speech today. “Monetary policy actions are constrained since interest rates cannot be reduced to below zero,” Yamaguchi said in Kagoshima, southern Japan. He said policies to spur spending are key to eradicating falling prices and the central bank is “always prepared to implement appropriate measures at an appropriate timing.” Japanese debt has handed investors a loss of 0.04 percent this month in local-currency terms, according to indexes from Bank of America Corp.’s Merrill Lynch unit. That translates into a profit of 3 percent for investors who converted the proceeds back to dollars. “Given prospects that the Bank of Japan will keep rates on hold amid deflation and that the U.S. won’t hike the federal fund rate immediately, investors can earn stable return by betting on bonds,” said Ryutaro Matsuyama, a strategist in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest banking group.

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