Japanese Notes Post Biggest Monthly Gain in a Year on Rate Cut

By Ron Harui and Stanley White

Nov. 1 (Bloomberg) -- Japan's five-year notes posted their biggest monthly gain in more than a year in October as the central bank cut interest rates to help bolster economic growth.

Yields on the securities dropped to the lowest in six months yesterday after the Bank of Japan lowered its benchmark rate to 0.3 percent, from 0.5 percent, the first reduction in seven years. Bonds also advanced as Japanese stocks declined and a government report showed inflation slowed.

``I expect bond yields to grind lower from here,'' said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co. in Tokyo. ``The BOJ's moves certainly aren't a reason to sell bonds. This is an effective move to quantitative easing. It's also difficult to find reasons for stocks to rise, and that will help JGBs.''

The yield on the benchmark five-year note fell 18 basis points last month, the most since August 2007, to 0.865 percent, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. The yield touched 0.84 percent yesterday, the lowest level since April 15.

The 10-year bond yielded 1.48 percent at yesterday's close, unchanged from a month earlier. The Nikkei 225 Stock Average slid 24 percent last month.

Ten-year bond futures for December delivery rose 0.07 yesterday to 137.98 on the Tokyo Stock Exchange, completing a monthly gain. They fell as low as 137.07 after the interest-rate decision was announced yesterday as the size of the cut was less than some economists expected.

Deciding Vote

Bank of Japan Governor Masaaki Shirakawa cast the deciding vote in the decision to lower the key overnight lending rate after four of the eight board members dissented. The last time the central bank lowered borrowing costs, in March 2001, it implemented a policy of so-called ``quantitative easing,'' in which it injected extra cash into the economy to fight deflation.

Three members of the BOJ's policy board who voted against the rate cut wanted a larger reduction, while one dissenter wanted to keep borrowing costs unchanged, Shirakawa said at a press conference in Tokyo after the decision. Fifteen of 17 economists surveyed by Bloomberg News predicted a reduction to 0.25 percent.

Bonds also gained yesterday after the statistics bureau said consumer prices excluding fresh food climbed 2.3 percent in September from a year earlier, after advancing 2.4 percent in August. The unemployment rate fell to 4 percent in September from 4.2 percent the previous month as job seekers stopped looking for work amid the economic slowdown, a separate government report showed.

Growth Forecast

The Bank of Japan slashed its economic-growth forecast for the year ending March to 0.1 percent from 1.2 percent predicted in July, in a twice-yearly outlook published after yesterday's rate decision. The economy will expand 0.6 percent next fiscal year and 1.7 percent in the period starting April 2010, the report said.

``The data such as inflation was positive for bonds,'' said Hiroaki Takai, who helps oversee the equivalent of about $6.9 billion in assets as assistant general manager at Sumitomo Mitsui Asset Management Co. in Tokyo. ``Worries over an economic slowdown may resurface.''

Ten-year bond yields may decline to 1.2 percent by year-end, Takai said.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.