July 29, 2013 / 6:26 AM / 4 years ago

JGBs down on sales tax concerns, Nikkei selloff supports

* Ten-year JGB futures steady in light trade

* Long-dated 20-year yield adds 0.5 basis point

* Japan’s five-year CDS steady

TOKYO, July 29 (Reuters) - Japanese government bond prices inched lower on Monday as concerns grew that a planned sales tax increase might be delayed or watered down, though a sell-off in Tokyo’s Nikkei share average offered support to the debt market.

“The Japanese equity market is heading lower and the dollar/yen broke the 98 yen level. These factors are supporting the JGB market,” said Tomohisa Fujiki, interest rate strategist at BNP Paribas in Tokyo.

“But at the same time there have been some reports that the consumption tax hike is not a done deal yet.”

The 10-year yield added 1 basis point to 0.795 percent, reversing its early fall to 0.775 percent, even though the Nikkei shed 3.3 percent, its biggest one-day drop since June 13, and the yen strengthened to a one-month high of 97.635 yen to the dollar.

Despite holding the strongest political mandate of any prime minister in years, there are signs Shinzo Abe is seriously rethinking the plan out of concern it could derail a nascent economic recovery he has crafted with an aggressive policy mix, dubbed ‘Abenomics’.

The country’s debt is more twice the size of its economy.

Government sources familiar with the matter said Prime Minister Shinzo Abe has ordered a study of the economic impact of various alternatives for implementing the planned sales tax increase, including a plan for more gradual 1 percent annual rises.

Bank of Japan Governor Haruhiko Kuroda said the sales tax increase would not hurt the economy and was needed to repair public finances, however.

“If the consumption tax is not going to be hiked, there should be large additional (JGB) issuance in the next fiscal year due to the shortage of tax revenue,” said Akito Fukunaga, chief rates strategist at Royal Bank of Scotland in Tokyo.

“It could also lead to a possible downgrade by leading credit rating agencies, so the fiscal risk could be factored into JGB yields.”

The 10-year JGB futures were flat at 143.63, with 13,329 contracts changing hands, versus the last two week’s daily average of 17,614.

Japan’s five-year credit default swaps were steady at 63/67 basis points.

“I don’t think the main buyers, the life insurance companies, really care about the fiscal problems. The actual impact could be limited,” said a fixed income fund manager at a Japanese asset management in Tokyo.

On Monday, the Japanese central bank offered to buy 450 billion yen ($4.6 billion) of JGBs with residual maturities of five to 10 years also supported the market, as part of its radical monetary policy to pull the economy out of deflation.

The 20-year yield was up 0.5 basis point at 1.710 percent after earlier falling to 1.700 percent, a level which it has not been able to trade below since late June.

The 30-year yield was unchanged at 1.825 percent.

U.S. Federal Reserve policymakers are likely to have a lively debate on how best to prepare financial markets for a reduction of their bond-buying programme, but appear certain to wait for further economic data before curtailing their stimulus. The Fed releases its post-meeting statement at 1800 GMT on Wednesday.

Among the key U.S. data this week are the second quarter GDP on Wednesday and the June non-farm payroll report on Friday.

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