Japanese government bonds fell on Friday after a Bank of Japan business survey showed that capital spending strengthened even as problems in the US subprime mortgage market cloud the economic outlook.
The central bank's quarterly tankan poll showed that big manufacturers expect spending to rise a higher-than-expected 10.5 percent in the financial year to next March, up from 8.7 percent in the September poll.
Smaller companies were more optimistic about the economy even as sentiment at large manufacturers hit a two-year low, the poll showed. "The outlook is not that strong, but it offers some assurance that sentiment has not decreased as much as some had feared," said Hitomi Kimura, a fixed-income strategist at J.P. Morgan Securities.
March futures fell 0.28 point to 136.46. They trimmed some earlier losses as the benchmark Nikkei share average slipped into negative territory. The yield on the benchmark 10-year JGB rose 3.5 basis points to 1.545 percent, edging closer to 1.585 percent hit on Tuesday, its highest since early November.
The yield curve steepened as the two-year yield slipped one basis point to 0.725 percent inching back towards a 14-month low of 0.695 percent hit earlier in the week.
The five-year yield rose 1.5 basis point to 1.060 percent, closing in on a one-month high of 1.090 percent hit on Monday. The headline index for big manufacturers in the BOJ's quarterly tankan was plus 19, lower than expectations for plus 21 and the weakest since September 2005, but the index for small manufacturers was plus 2, stronger than forecasts for minus 2.
Friday's figures did little to change market expectations that the BOJ will have a hard time raising interest rates from 0.5 percent until well into 2008, analysts said.
Fitch Ratings' affirmation of Japan's sovereign debt rating on Friday had little impact on JGBs, market players said. JGBs also came under selling pressure after US Treasuries fell on Thursday, when a surprising surge in US producer prices and solid retail sales in November raised the possibility that the Federal Reserve may not continue to cut US interest rates as aggressively as initially expected.
Treasury yields have risen since the Fed and other central banks announced steps on Wednesday to make it easier for stressed banks to access cash. The joint plan helped temper flight-to-safety bids for Treasuries. Treasuries and JGBs are likely to be supported by ongoing worries about the US subprime mortgage crisis and the outlook for the US economy, said Seiji Shiraishi, chief economist at HSBC Securities.
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