Tokyo: Japan's government bonds rose, with five-year notes completing a fourth weekly gain, on speculation the central bank will increase funds in the financial system to keep borrowing costs down.

Bond futures advanced to the highest level this year after the Nikkei newspaper said the Bank of Japan may discuss additional monetary easing steps at its next meeting starting on March 16.

Bonds also gained after a government report last week showed Japan's businesses cut spending for an 11th quarter.

"As the BOJ is reportedly moving toward additional easing, investors who haven't bought are playing catch-up, supporting bonds," said Atsushi Ito, a Tokyo-based strategist at Morgan Stanley Japan Securities Co. "The central bank is likely to extend its credit programme from three months to six months rather than expanding quantity."

Drop in basis points

The yield on the 0.5 per cent note due December 2014 fell 3.5 basis points to 0.46 per cent last week at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.164 yen to 100.187 yen.

The four-week gain in the notes was the longest advance since December. The yield was the lowest since December 30. A basis point is 0.01 percentage point.

Ten-year bond futures for March delivery rose 0.32 to 140.19 in Tokyo. On Friday they touched 140.27, the highest since December 22.

Bank of Japan

The BOJ said on December 1 it would set aside 10 trillion yen (Dh409 billion) to make three-month loans at a rate of 0.1 per cent. The decision came as government officials urged policy makers to support the economic recovery by fighting deflation.

The central bank is likely to reach a decision on specific measures in April, the Nikkei newspaper reported Friday, without saying where it got the information.

"It seems like the central bank is aiming to lower term rates further," Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., a unit of Japan's second-largest banking group, wrote in a research note.

"Five-year yields may settle below 0.5 per cent for a while."

The three-month interbank offered rate fixed in Tokyo, known as Tibor, was at 0.446 per cent yesterday, according to the Japanese Bankers Association.

The rate has room to drop as it remains high relative to comparable borrowing costs in London, Miura said.

Three-month yen Libor on March 4 dropped below the dollar rate for the first time since August, according to the British Bankers' Association. The yen rate was 0.251 per cent on March 4, compared with 0.252 per cent for dollar loans.

Finance Minister Naoto Kan said on Friday he is aware of media reports that the central bank may consider further monetary easing, though he hasn't heard anything from the bank.

Capital spending by Japanese companies slid 17.3 per cent last quarter from a year earlier, after dropping 24.8 per cent the previous three months, the Finance Ministry reported on March 4 in Tokyo.

Japan's government bonds have handed investors a return of 0.1 per cent this year, according to an index compiled by Merrill Lynch.