Japanese government bonds were flat on Thursday after Bank of Japan Governor Toshihiko Fukui struck a note of caution, saying a sustained rise in oil prices and the fallout from Hurricane Katrina were risks to the global economy.
Fukui couldn't say whether the BOJ would raise interest rates immediately after ending its ultra-easy monetary policy, but repeated the BOJ needed to ensure the economy does not fall back into deflation even after consumer prices start to rise.
Earlier the central bank maintained its policy of flooding the banking system with cash as expected, and Fukui said the BOJ would do so until the consumer price index turns and stays positive.
Still, bond investors are already looking ahead to the possibility the BOJ could terminate the ultra-easy policy early next year if deflation is beaten.
Upbeat comments from BOJ Deputy Governor Toshiro Muto last week that consumer prices may rise early next year stoked expectations the central bank could ditch its "quantitative easing" policy soon into 2006.
"There's a possibility that speculation of an end to quantitative easing will grow," said Kenro Kawano, strategist at Credit Suisse First Boston.
Data earlier in the day also came out better than expected, pointing to solid business capital spending ahead and even improvement in the long decline of bank lending.
Core private-sector Japanese machinery orders fell 4.3 percent month-over-month in July, better than forecasts and following a big 11.1 percent jump in June.
September 10-year JGB futures fell 0.03 point to 139.98. The December contract, which takes over as the benchmark on Friday, closed the session down 0.03 point at 139.67. The benchmark 10-year JGB yield rose 0.5 basis point to 1.325 percent. Both two and five-year yields were flat at 0.135 percent and 0.535 percent.
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