Japanese government bonds (JGBs) recovered on Thursday, helped by a rebound in US Treasury prices and by a drop in the Tokyo stock market as it took a breather after hitting four-year highs.
JGBs had been pressured by the Nikkei share average, which had rallied over the past six weeks on growing optimism that the Japanese economy was making a self-sustaining recovery.
Selling accelerated over the past week as speculation that the Bank of Japan may end its ultra-easy monetary policy in the coming year intensified after BOJ officials painted a brighter picture for consumer prices. A steady rise in consumer prices is a precondition for the central bank to end its "quantitative easing" policy of flooding the banking system with cash and pinning interest rates near zero. Japanese shares fell as a third day of declines on Wall Street increased caution over stock valuations after a recent rally. The drop in US shares, in turn, had lent support to the US government debt market on Wednesday.
"The overseas factor is the main driver in the JGB market," said Akihiko Yokoyama, JGB strategist at J.P. Morgan Securities.
The 10-year Treasury yield fell to 4.18 percent on Wednesday from 4.25 percent on Tuesday as an approaching hurricane raised expectations for higher energy costs, which could undermine consumer spending and force an economic slowdown.
JGB traders said Japanese government debt prices were likely to be capped, as Tokyo stocks were expected to resume their climb after undergoing a correction from their recent rally. At 0040 GMT, December 10-year futures were up 0.21 point at 139.03, after falling as low as 138.67 to their weakest level in a month the previous day.