* Longest maturities suffer from concern on fiscal easing
* Abe may issue debt to finance supplementary budget
* Hopes for more BOJ bond buying support shorter maturities
* BOJ seen adopting 2 pct inflation target Abe wants
By Hideyuki Sano
TOKYO, Dec 17 Long-dated Japanese government
bonds fell on Monday, with the 20- and 30-year yields hitting
eight-month highs after an election victory by the Liberal
Democratic Party (LDP) raised the possibility of aggressive
monetary easing and more spending.
"Long-end bond yields will keep rising gradually. That's
unlikely to stop. There are concerns that the new government may
compile a bigger supplementary budget and raise bond issues even
during this fiscal year (to March)," said Akito Fukunaga, chief
rates strategist at RBS.
The LDP's policy platform is seen as negative for the
longest maturities because it could, if successful, boost
economic growth, and even if unsuccessful in boosting growth,
could still lift inflation.
Either way, long-dated bonds are likely to suffer while
shorter maturities are likely to benefit from bolder monetary
easing, which is likely to involve more buying of short-term
The 30-year bond yield rose 1.5 basis points to 1.965
percent, its highest level since April while the
20-year yield edged up 2.0 basis points to 1.715
percent, also an eight-month high.
Shorter maturities were firmer, with the 10-year yield flat
at 0.730 percent and the five-year yield also
unchanged at 0.175 percent, as the Bank of Japan
is expected to step up buying in shorter bonds in any future
The 10-year JGB futures price fell 0.07 point to 144.23
"It is easy to predict a steepening in the yield curve.
Investors know that five-year bonds are unlikely to be sold
off," said Tohru Yamamoto, chief strategist at Daiwa Securities.
The spread between the 10- and 20-year yields rose to 98.5
basis points, just below a 13-year high of 99 hit earlier this
Selling in "superlong" bonds, such as 20- and 30-year bonds,
partly reflected caution ahead of a 20-year bond auction on
But many market players think the "superlong" sector is
likely to underperform even after that, given wariness over the
policy stance of a new government led by Shinzo Abe, who is due
to be formally appointed as prime minister on Dec. 26.
Abe's LDP had won 294 seats in the 480-member lower house,
while its ally the New Komeito party took 31 seats, giving them
a two-thirds majority needed to overrule parliament's upper
house in legislation.
Abe said on Monday he would compile a "large scale" extra
budget to fight deflation.
Japan's economy has contracted for two straight quarters,
which some view as a definition of recession, and the BOJ's
tankan survey last week showed Japanese corporate sentiment
Some market players think the government will finance the
stimulus by more borrowing, which would add to Japan's already
immense stockpile of public debt, which now amounts to about 200
percent of its GDP.
Abe also repeated he wants to have an accord with the BOJ to
have an inflation target of two percent and market players think
the BOJ will eventually heed his calls in one way or another.
Less certain is whether the BOJ will take fresh easing steps
this week. Market players now feel there is a 50 percent chance,
or even slightly less, of the BOJ increasing its asset purchase
programme at its meeting on Wednesday and Thursday.
"Given the yen is sharply weaker and that the worsening in
the tankan was widely in line with expectations, my impression
is there is a less than 50 percent chance of increase in asset
buying this week," said Fukunaga at RBS.
Abe is also likely to try to install a dovish central banker
to replace the current chief Masaaki Shirakawa when his term
expires in April -- a factor that has been supporting steepening
Still, unlike bills which Abe can push through by using his
two-thirds majority in the more powerful lower house, the
central bank's top job needs approval from both houses of the
parliament, including the upper house, which will remain under
the control of the Democratic Party.
That means Abe needs to find a BOJ candidate who is
acceptable to the Democrats.