JGBs edge up as market begins to digest supply news
* Nerves ease over looming supply increase
* JGBs dip in early trading as Nikkei gains
* Bonds reverse losses as demand begins to revive
TOKYO, April 10 (Reuters) - Japanese government bonds reversed earlier losses and edged up on Friday as investor demand for debt revived a little with the market beginning to process news of an upcoming increase in supply.
JGBs were dogged much of the week by supply concerns as traders waited for the government to hammer out its plans for an economic stimulus package that is expected to be mainly funded by debt.
The ruling party unveiled on Thursday a 15.4 trillion yen ($154 billion) stimulus plan, worth around 3 percent of GDP, to battle a deepening recession. [ID:nT325185]
JGB issuance to pay for the government measures is expected to top 10 trillion yen ($100 billion) with a domestic newspaper saying the amount could be significantly higher.
But market watchers said prospects of a supply increase were slowly being digested by investors now the outline of the government's stimulus is out, underpinning JGBs on Friday.
"Nerves are a little calmer as we have been able to see what the economic package will involve," said Takafumi Yamawaki, a senior fixed-income strategist at BNP Paribas.
"Investors are still waiting to see how extra issuance will be spread out along the maturities but some also need to begin new fiscal year purchases."
The benchmark 10-year yield fell 2 basis points to 1.455 percent JP10YTN=JBTC after hitting 1.490 percent, the highest since mid-November.
Bond prices had slipped early on as the Nikkei stock average .N225 gained after a rally on Wall Street, momentarily rising above the psychologically important 9,000 point for the first time since early January.
June 10-year futures 2JGBv1 rose 0.17 point to 136.70 after slipping to 136.44.
The five-year yield dipped 2.5 basis points to 0.870 percent JP5YTN=JBTC.
The 20-year yield was unchanged at 2.105 percent JP20YTN=JBTC, with the super-long zone underperforming ahead of next week's 30-year JGB auction.
The Bank of Japan's decision last month to boost the amount of government bonds it buys from the market to 1.8 trillion yen a month from 1.4 trillion yen partly explains why the JGB market has been able to digest news of a supply increase with a degree of calm.
Focus is now on how the BOJ steers monetary policy in the face of a looming government debt supply increase, which could tug yields higher in the longer term.
The central bank has maintained a cautious assessment of the economy despite recent stock market gains, and minutes of a March policy board meeting suggested it could cut its economic forecasts when it releases its twice-yearly outlook report on April 30. [ID:nTKU103359]
"The BOJ could decide to ease monetary policy further if it revises down its outlook on the economy and prices," Kenro Kawano, a senior rates strategist at Credit Suisse, wrote in a note.
A likely easing step would be for the BOJ to increase the amount of JGBs it buys, particularly shorter-dated debt, Kawano said.
Market players said the prospect of a supply increase is expected to weigh more on shorter-dated bonds, which saw a greater increase compared to other maturities when the Ministry of Finance raised its JGB issuance plans for fiscal 2009/10. (Editing by Joseph Radford)
