* U.S./Japan benchmark yield spread at widest since April
* Yen sinks to lowest level vs dollar since July 2010
By Lisa Twaronite
TOKYO, Jan 4 A sharp rise in benchmark Japanese
government bond yields on Friday was overshadowed by an even
sharper rise in U.S. Treasury yields and diverging monetary
policy outlooks could push the spread wider still.
The shifts in the yields helped push the dollar to its
highest level against the yen in nearly two and a half years and
with the spread expected to swell, the yen could face more
pressure, analysts said.
Tokyo markets reopened on Friday after the long New Year's
holiday with expectations that 2013 will bring more fiscal and
monetary stimulus measures in Japan. By contrast, the U.S.
monetary outlook grew less clear after the release on Thursday
of the minutes of the Federal Reserve's December meeting.
While the Fed looks set to continue buying bonds, some
policymakers appeared wary of increasing the U.S. central bank's
$2.9 trillion balance sheet.
The minutes fuelled a selloff in Treasuries, pushing 10-year
yields on Friday above 1.929 percent in Asian trade,
their highest level since May.
"The market expected the Fed to buy about half of the new
issuance of Treasuries this year, and the minutes contained
words that made some investors completely rethink their
supply/demand expectations," said Hiroki Shimazu, senior market
economist at SMBC Nikko Securities.
The 10-year JGB yield gained 4 basis points
to 0.835 percent, its highest level since Sept. 13.
While the move marked its biggest one-day basis-point move
since Aug. 7, the spread between U.S. and Japanese gapped to
about 110 basis points, its widest since April 2012.
"The U.S. might be going into exit mode much earlier than
people thought, as opposed to the BOJ, which is a lap or two
behind," said Shogo Fujita, chief Japanese bond strategist at
Bank of America in Tokyo.
"It's feeding from both sides -- the base money effect, as
the BOJ increases the money supply even further than the Fed in
the next few months, and also the fact that the Fed may be
stopping its increasing of the monetary base within the next 12
months, as the BOJ continues to go on -- this will obviously
drive the interest rate side," he said.
Fujita said the U.S./Japan yield spread could widen further
on expectations that the U.S. economy will shift into a
sustainable recovery towards the end of the year. Fujita
predicted the spread could widen to 150 basis points by the
middle of 2013.
The spread was as narrow as 70 basis points as recently as
July, when Europe's debt woes sent yields in that region
soaring, and investors flocked to the perceived relative safety
of both U.S. and Japanese sovereign debt.
A widening U.S./Japan yield spread adds to pressure on the
yen, which was fetching 88.20 per dollar on Friday, after
sinking as low as 88.34 yen, its deepest nadir since July 2010.
That followed the dollar's dramatic 12.8 percent rise against
the Japanese currency in 2012, its biggest yearly percentage
rise since 2005.
Investors are betting that the new government of Prime
Minister Shinzo Abe will push to weaken Japan's currency and
implement aggressive stimulus, and lean on the BOJ to do the
Abe has called on the Bank of Japan to set a 2 percent
inflation target, and has also vowed to select someone who
shares his views on drastic stimulus to succeed BOJ Governor
Masaaki Shirakawa, whose term expires in April.