TOKYO: Japanese government bonds mostly slipped on Friday as a weaker yen lifted the stock market, while expectations of further policy easing by the Bank of Japan next week lifted shorter maturities.
The yield curve steepened, with the yield on relatively illiquid 2-year JGBs easing to a 7-1/2-year low, while yields in the superlong tenor reached for multi-month highs touched a week ago.
At its two-day meeting ending on Tuesday, the BOJ will consider scrapping interest it pays on banks' reserves and pledging to buy assets on an open-ended basis until 2 percent inflation is foreseen, sources familiar with the central bank's thinking said.
"I wouldn't be surprised to see them cut the paid interest on excess reserves, and it seems the market is pricing it in already," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.
The 10-year JGB yield rose 2 basis points to 0.750 percent, moving away from Thursday's intraday low of 0.730 percent, its lowest since Dec. 17.
Koichi Hamada, special economic adviser to Prime Minister Shinzo Abe, told a news conference on Friday that the BOJ was likely to take some form of easing measures next week.
He also said acknowledged the risk of inflation fuelled by an oversupply of money but said there was no ground for substantial inflation now, a statement likely aimed at quelling inflation concerns that have weighed on superlong bonds in recent weeks.
The 10-year JGB futures contract ended down 0.13 point at 144.25, snapping its five-session winning streak and pulling away from Thursday's intraday high of 144.50, which was its highest since Dec. 13.
Japan's Nikkei share average soared 2.9 percent on Friday as exporters gained on expectations that the central bank will ease monetary policy aggressively next week, putting more downward pressure on the yen.
"The rally in shares is taking demand away from JGBs overall, but expectations of more BOJ easing is limiting losses, and is pushing up short- and medium term notes," said a fixed-income fund manager at a Japanese asset management firm in Tokyo.
The yield on the 2-year JGB, which is often inactive in cash trading, slipped half a basis point to 0.070 percent, its lowest since July 2005.
The 5-year JGB yield also shed half a basis point to 0.150 percent, matching lows hit this week and last, and within sight of its record low of 0.145 percent hit during Japan's banking crisis in June 2003.
The superlong tenor dropped, with pension funds said to be selling, though yields remained well off highs hit a week ago.
The yield on the 20-year bond added 3 basis points to 1.765 percent, moving back towards Jan. 11's high of 1.805 percent, its highest since April 2012.
The 30-year bond yield rose 2.5 basis points to 1.995 percent, moving back toward Jan. 11's high of 2.025 percent, its highest since August 2011.