Japanese government bond yields hit four-month highs on Monday as stocks rose and investors judged that the defeat of key reform bills and the calling of a snap election were not enough to outweigh optimism on Japan's economy. JGBs initially rallied on Monday as the Nikkei 225 share average extended losses after Japan's upper house of parliament rejected a set of key postal reform bills.
Bond prices then fell as stocks edged back into positive territory by the day's close, shrugging off news that Japan would go to the polls on September 11 in a vote that many believe could bring down the government of Prime Minister Junichiro Koizumi.
The threat of political chaos was not enough to dampen the effects of a series of upbeat economic reports in the past month that have suggested an end to the Bank of Japan's ultra-loose monetary policy may be just around the corner.
"When the (JGB) market started to sell off two weeks ago, it was not because of worries about postal reforms," said Tatsuo Ichikawa, JGB strategist at ABN Amro. "It was all about economic data and the monetary policy outlook." Many foreign investors, which have snapped up almost 11 trillion yen ($97.88 billion) of Japanese stocks and bonds this year to date, view Koizumi and his battle to privatise the postal system as a symbol of Japanese economic reforms.
Key September 10-year JGB futures fell 0.28 point to 138.82, the lowest in four months. They briefly rose into positive territory after the postal bills were rejected.
Benchmark cash 10-year JGBs fell, pushing up the yield three basis points to 1.410 percent, the highest level since March 24.
JGBs also followed a sharp fall in US Treasury prices, which were hit by a strong jobs report on Friday that suggested the Federal Reserve had plenty of room to keep raising interest rates.
The Nikkei average edged up 0.11 percent to 11,778.98. It has fallen around 2 percent from a 15-month high just above 12,000 hit last Wednesday.
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