Japanese government bond prices fell on Monday as investors warily watched Tokyo stocks regain ground and an upbeat report by the Bank of Japan (BOJ) on the outlook for the economy.
The BOJ's twice-yearly report, released after the end of the benchmark futures' regular session, forecast a steady rise in Japanese consumer prices, underscoring expectations that its ultra-easy policy may end as early as the first half of 2006.
Traders were awaiting a news conference by BOJ Governor Toshihiko Fukui from around 0630 GMT, while casting an eye on Prime Minister Junichiro Koizumi's cabinet reshuffle later in the day.
December 10-year futures shed 0.33 point to 137.10 in the regular session to 3 pm (0600 GMT). In the evening session from 3:30 pm (0630 GMT), the December futures slipped further to 137.01 on the BOJ's report.
Benchmark 10-year yields rose to 1.545 percent, up 3.0 basis points. Five-year yields rose four basis points to 0.840 percent. Both of those yields were hit before the BOJ's report. They were untraded after the report.
The Nikkei stock average rose 1.95 percent to 13,606.50. The broader TOPIX index gained 1.75 percent to hit a five-year high, after strong US growth data boosted Wall Street shares last week.
The BOJ's outlook on the economy and prices showed the central bank's "majority" core consumer price index (CPI) forecasts for fiscal 2006/07, starting next April, ranged between plus 0.4 and plus 0.6 percent - mostly in line with market expectations. Of the majority forecasts, which exclude the highest and lowest forecasts of the nine-member Policy Board, the median projection was plus 0.5 percent, higher than plus 0.3 percent estimated by the board in its previous report in April.
But even the forecast by all members was the same as the majority's.
"Even the most dovish board member now expects the CPI to rise 0.4 percent. The report suggests the BOJ is pretty much a monolith when it comes to ending quantitative easing," said Koji Ochiai, senior market analyst at Mizuho Securities.
Traders said the market faced additional pressure ahead of the Ministry of Finance's offer of 1.9 trillion yen ($16.42 billion) of 10-year JGBs on Tuesday.
Traders said they did not expect a direct market impact from the cabinet reshuffle expected later in the day.
The finance minister's position is the most relevant to the JGB market but analysts said regardless of who takes the job, Japan's basic policy of curbing its huge government debts will be unchanged.
The JGB market will also be looking at key events in the United States this week that could move the Treasury market.
Federal Reserve policy makers are widely expected to raise key short-term rates when they meet on Tuesday.
Monthly jobs data due on Friday is expected to shed light on how the US economy absorbed damage from powerful hurricanes.