Japan's Bonds Gain for Third Week on Growing Recession Concern

By Theresa Barraclough

Aug. 16 (Bloomberg) -- Japan's 10-year bonds gained for a third week on growing speculation the world's second-largest economy is on the brink of a recession.

Ten-year yields fell to the lowest in almost four months during the week after a government report on Aug. 13 showed the economy contracted last quarter for the first time since 2001. Benchmark bonds also advanced on speculation the central bank will cut its assessment of the economy for a second straight month in a report next week.

``The GDP report in Japan suggested ongoing sluggish business activity and the Bank of Japan is likely to downgrade its assessment of business conditions next week,'' said Susumu Kato, chief economist in Tokyo at Calyon Securities, one of the 26 primary dealers required to bid at government debt sales. ``This is very supportive for JGBs.''

The yield on the 1.5 percent bond due June 2018 fell 1 basis point this week to 1.455 percent according to Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.086 yen to 100.387. The yield fell as low as 1.415 percent on Aug. 14, the least since April 21.

Ten-year bond futures for September delivery gained 0.01 this week to 137.69 on the Tokyo Stock Exchange. A basis point is 0.01 percentage point.

The nation's gross domestic product shrank an annualized 2.4 percent in the three months ended June 30 as exports and consumer spending fell, the Cabinet Office said in Tokyo.

`Downside Risks'

``The economy is weakening and there are more downside risks,'' Japan's Economic and Fiscal Policy Minister Kaoru Yosano said at a press conference in Tokyo on Aug. 13. ``With prices rising, consumers are becoming cautious about spending and holding back consumption.''

The odds were 11 percent yesterday that the Bank of Japan will reduce its target rate to 0.25 percent from 0.5 percent by year end, according to calculations by JPMorgan Chase & Co. using interest-rate swaps. The chance was 5 percent a week ago.

The gain in bonds this week was tempered on speculation 10- year yields near the lowest since April deterred investors from buying government debt.

The yield climbed as much as 6 basis points during yesterday's trading, the biggest intraday gain since July 7, after a technical chart traders use to gauge changes suggested the recent rally in bonds was too rapid.

`Too Low'

``The yields are just too low and the market looked overheated,'' said Takashi Nishimura, an analyst in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets. ``Investors ought to start thinking about the risk of an upward revision of the economic outlook as we have been too pessimistic about the Japanese economy.''

The 10-day relative strength index on 10-year yields declined to 28 on Aug. 14, the second day it was below 30, a level that implies the securities are overbought. The last time the index fell under 30 for two consecutive days was on March 13 and 14. Yields gained a total of 6 basis points during the following two days.

``A lot of market participants are skeptical about further yield declines,'' said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo.

Ten-year bonds also gained this week on speculation corporate failures will increase as economic growth falters, underpinning demand for low-risk assets.

`Deepening Slump'

Urban Corp., Japan's worst-performing real-estate stock in 2008, filed for protection from its creditors on Aug. 13 with debt of 255.8 billion yen ($2.32 billion), making it the largest bankruptcy among listed companies in the nation this year. Urban became the fifth publicly traded Japanese property company to file for court protection in the past month.

The bankruptcy ``underscores the deepening slump in the real estate market and negative implications on bank balance sheets,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp., wrote in a research note on Aug. 14. The real-estate slump should add to caution of risky lending and ``should be positive for the JGB market.''

Trading was lower than average this week due to the nation's Obon summer holidays, Mitsubishi UFJ's Nishimura said.

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