Japanese government bonds rose on Monday as the yen's jump against the dollar hurt exporters and pushed the Nikkei share average sharply lower, but profit-taking kept a cap on JGB prices.
Bond market sentiment was supported early in the session by gains in US Treasury prices on Friday, with investors hunting for bargains after last week's volatile trade in which the 10-year yield climbed near a seven-year high.
But after a round of short-covering, a sense of caution set in ahead of the Bank of Japan's one-day policy meeting and the release of March consumer price data, both due on Friday. That caution may dominate the bond market this week.
"JGB prices could stay near current levels for a while, with few market players willing to sell or buy aggressively ahead of important economic events later this week," said Tetsuya Miura, JGB strategist at Shinko Securities.
The benchmark 10-year cash bond yield shed 1.5 basis points to 1.890 percent. It hit 2.0 percent last week, its highest since August 1999.
Part of the bond price gains were due to the heavy drop in the Nikkei share average, which lost nearly 3 percent on Monday, booking its biggest fall since January and ending below the 17,000 for the first time since late March.
The core nation-wide consumer price index (CPI) data due Friday may point the way for the bond market, as the BoJ uses this a gauge in setting monetary policy. The core CPI is expected to have risen 0.6 percent in March from the same month a year ago, after rising 0.5 percent in February.
In addition to holding a policy board meeting, the BoJ will release its twice-yearly outlook report on the economy and prices on Friday, which could shed light on its thinking about inflation.
Traders and analysts said they would also be looking for clues from BoJ Governor Toshihiko Fukui's post-meeting news conference on how the central bank viewed market rates having already discounted two rate hikes by the end of 2006.
The 20-year yield dipped one basis point to 2.275 percent, while the five-year yield fell 2.5 basis points to 1.320 percent.
June futures climbed 0.23 point to 132.82, off an intraday high of 132.91, but up more than a yen from a 5-1/2-year low of 131.75 hit earlier this month.
The market largely ignored the results of Friday's meeting of financial officials from the Group of Seven leading industrialised nations.