Japan's 10-year bonds complete weekly gain

Tokyo: Japan's 10-year bonds completed a weekly gain on speculation chronic deflation will encourage the Bank of Japan to keep its benchmark interest rate near zero when policymakers meet this week.

Benchmark yields stayed near the lowest level in two weeks before a report on February 15 that economists said will show prices fell at a faster pace in the final quarter of 2009 even as economic growth quickened. Bond futures dropped Friday as stocks advanced for second day after European Union leaders pledged to help Greece tackle it swelling budget deficit.

"A quickening expansion won't dispel strong deflationary pressure immediately," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"The Bank of Japan is still far away from exiting credit easing, which will continue to support the debt market."

Ten-year yields fell 2.5 basis points last week to 1.33 per cent in Tokyo at Japan Bond Trading Co, the nation's largest interdealer debt broker. They slid to 1.325 per cent on February 10, the lowest level since February 1.

Benchmark yields rose half a basis point on Friday and 10-year bond futures for March delivery slipped 0.06 to 139.37 at the close of the Tokyo Stock Exchange.

Deflator

The gross domestic product deflator declined 2.3 per cent in the fourth quarter from a year earlier, according to a Bloomberg News survey. The deflator is used to calculate real GDP, or economic growth adjusted for price changes.

The economy grew an annual 3.5 per cent last quarter, after expanding 1.3 per cent in prior three months, according to a separate Bloomberg survey.

"Japan may be able to stave off a double-dip recession," said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo. "Still, it's questionable whether a recovery in domestic demand without stimulus is possible. The economy is still highly dependent on overseas demand, underscoring the fragility of the recovery."

The Bank of Japan will keep its overnight call rate at 0.1 per cent throughout 2010, according to Bloomberg News survey.

BOJ Governor Masaaki Shirakawa and fellow board members will start a two-day policy meeting on February 17. Central bank board members this month affirmed their forecasts for Japan's economy to keep expanding while consumer prices will fall through the year ending March 2012, a third- year of declines.