TOKYO: Benchmark Japanese government bonds slipped on Thursday, with the 10-year yield edging up to the 0.8 percent level for the first time in three months as conviction grew that the new government of Premier Shinzo Abe will push hard on fiscal and monetary stimulus.
With demand for bonds undermined, Japan's Nikkei share average climbed to a 21-month high on Thursday, led by exporters and financials, as Abe's vow to battle deflation pushed the yen to a more than two-year low against the dollar.
"It's a very light market, so I'm not too sure if we can substantiate much from this price action, but I guess it is a positive kick for Abe, in a sense," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.
"We are on the way up, but [the benchmark yield] is not going past 1 percent yet," he said. "This is a trade about Japan playing catch-up with other Western countries. It's not about Japan changing."
The 10-year yield added 1.5 basis points to 0.800 percent, its highest level since Sept. 21.
The benchmark 10-year JGB futures contract ended down 0.16 point at 143.50, just two ticks above its session low, which was the lowest level since Sept. 18.
Japan's new Finance Minister Taro Aso said on Thursday that Abe has ordered him to compile a stimulus package without adhering to a previously agreed cap on new bond issuance.
Japan's previous government agreed to limit new bond issuance to 44 trillion yen ($519 billion), to help prevent the country's public finances from deteriorating.
"Aso didn't say anything unexpected, and I think most market participants are already bracing for more issuance next year as the new government carries out its pledge for massive fiscal stimulus," said a fixed-income fund manager at a Japanese asset management firm in Tokyo.
Aso said late on Thursday that the government would not rely solely on bond issuance to fund an extra economic stimulus package, and would try to limit fresh issuance to ensure market confidence when compiling an annual budget for the next fiscal year.
Yields on 20-year bonds also added 1.5 basis points to 1.760 percent, their highest since April 6. Their spread over 10-year yields rose to 96 basis points, up from 95 basis points earlier in the week and approaching this month's high of 99 basis points.
Benchmark JGBs have lost 5.7 percent in 2012 in dollar-based terms, according to Reuters data.
Friday will mark the last trading day ahead of the long New Year's holiday in Japan. Markets here will reopen on Jan. 4.
Center>Copyright Reuters, 2012
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