Japan's unpopular Prime Minister Naoto Kan this month signalled his intention to resign and focus is on who would take his place and the succession's potential impact on fiscal policy.

Of the candidates likely to replace Kan analysts say the bond market would probably welcome the appointment of Finance Minister Yoshihiko Noda. Considered a frontrunner to succeed Kan, Noda is a known fiscal hawk and favours raising taxes to reduce the country's reliance on debt, at about 200 percent of its $5 trillion GDP.

But even the appointment of a fiscal hawk like Noda as prime minister would not guarantee that the government would not issue large amounts of extra debt as it faces the task of rebuilding after the devastating earthquake and tsunami in March.

JGB 10-year futures rose 0.12 point to 142.31, edging closer to, but still some distance from, a nine-month peak of 142.64 struck last week following a plunge in equities on the back of a US credit rating downgrade.

The benchmark 10-year yield fell 1.5 basis points to 1.020 percent. The yield briefly dipped to a nine-month trough of 0.975 percent during last week's rally. But it was quickly pushed back above the 1 percent threshold on fiscal concerns and after a US debt downgrade raised fears that other sovereigns including Japan may be next to be cut.

The Nikkei average fell 1 percent on Wednesday after a meeting between the heads of France and Germany failed to quell doubts about the ability of euro zone leaders to contain sovereign debt woes.

COPYRIGHT REUTERS, 2011