Japanese government bond (JGB) prices rose to one-month highs on Wednesday, buoyed by a fall in stocks, but dealers said that activity was thin as they awaited the release of economic data later in the week. Low-yielding JGBs were supported by a 0.75 percent fall in the Nikkei share average, which was dragged down from a six month high by a slump in US shares and a weaker dollar against the yen.
"The fall in stocks attracted buyers, and with volatility very low of late we're seeing a range of investors slowly increasing their JGB holdings," said Susumu Kato, chief fixed income strategist at Lehman Brothers in Tokyo.
The yield on the benchmark 266th 10-year cash bond fell three basis points to 1.360 percent, breaking out of the unusually narrow range of 1.38 to 1.42 that it had drifted in in this month to date.
The key March JGB futures contract gained 0.23 point to 139.16, its highest close since December 16.
Under a four-year-old ultra-loose monetary policy, the Bank of Japan floods the money markets with liquidity, much of which finds its way into bonds as banks and institutional investors look for safe investments.
"We have been seeing continuous buying from pension funds and so the demand-supply balance is quite good now," said a senior trader at a Japanese brokerage.
"But I don't expect the rally to last long because this buying is not based on any changes to investors' economic views."
Japan's economy grew just 0.2 percent in July-September on an annualised basis, a sharp slowdown from the first quarter of 2004, when it expanded 6.8 percent.
Most analysts expect Japan's economy to break out of a soft patch and return to steady growth by mid-2005, but investors are waiting for evidence before turning bearish on JGBs.
The key event for the market this week is the release of machinery orders data for November, due on Friday.
A Reuters survey of 27 analysts produced a median forecast of a 3.3 percent month-on-month rise in core private-sector machinery orders, considered a key gauge of capital spending trends.
It would be the first increase in three months in the core index, which excludes orders in the shipping and electric power sectors.
Many traders are cautious that the traditionally volatile data could surprise the market.
At the short end of the curve, an auction of 13-week financing bills by Japan's Ministry of Finance drew record bids of 2,740 trillion yen ($26.510 trillion) on Wednesday, roughly equal to half the value of the global economy.
Analysts said there was strong demand from Japanese banks eager to keep funds in such bills before the government cuts guarantees on bank deposits in April.
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