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Updated Friday, November 20, 2009 10:58 am TWN, Reuters

Japan FM is watching bond yields carefully

TOKYO -- Japanese Finance Minister Hirohisa Fujii said on Thursday he was watching bond market moves very carefully as yield rises that are not driven by a strong economy are damaging to growth. Bond yields have risen this month as investors became increasingly worried about a surge in debt issuance, although they have fallen this week on government reassurances it will ensure spending plans do not rattle bond market confidence.

Fujii, speaking in parliament, said it was good to see long-term interest rates fall somewhat from last week's highs. He added that the recent rises in bond yields were not driven by expectations of an economic recovery and therefore would do more harm than good.

“We must be careful about rises in interest rates that are not caused by improvements in the economy,” he said.

The government, facing sliding tax revenues, may issue 52 trillion yen (US$583 billion) in new bonds in the fiscal year ending next March, up 18 percent from its current estimate, Japanese media reported on Thursday. Falling tax revenues also threaten its goal of capping issuance for next fiscal year at 44 trillion yen in new bonds, the Mainichi newspaper reported.

Fujii has previously signaled new bond issuance for the year to March 2010 may top 50 trillion yen with tax revenues set to fall more than 6 trillion yen short of initial estimates. But the Mainichi said, without citing sources, that there was a growing likelihood the tax revenue shortfalls would hit 8 trillion yen due to the weak economy, meaning new bond issuance would reach 52 trillion yen.

Early last week the 10-year government bond yield climbed to a five-month high of 1.485 percent on concerns that Japan, with its public debt approaching 200 percent of GDP, may issue more bonds to cover tax revenue shortfalls and finance budgets. But it has plunged since then, reaching a one-month low of 1.295 percent on Wednesday, after cabinet ministers reiterated that the government would try to keep new bond issuance for next fiscal year at 44 trillion yen.

The fiscal concerns helped widen the two-year/10-year yield spread to a 3-1/2-year high of 121 basis points last week. Japan's sovereign five-year credit default spread widened to around 77 basis points early last week, its highest since April. Currently the official estimate of new bond issuance is 44 trillion yen this year.

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