Japanese government bond (JGB) prices inched up on Wednesday, supported by a tumble in Japanese stock prices and by gains in US Treasuries, which snapped a nine-day losing streak in the previous session.
September JGB futures pulled further away from a six-year low hit on Tuesday, but traders refrained from buying aggressively ahead of a widely anticipated rise in US interest rates when the Federal Reserve ends a two-day policy meeting on Thursday.
The Bank of Japan is gearing up to raise its overnight discount rate for the first time in six years, with many in the market expecting a rise as early as July. However, a belief that the pace of any subsequent rate rises would be slow offered some support.
"We're seeing some buying on dips on expectations that the BOJ could take its time in raising rates, especially if stock prices continue to fall," said Hidenori Suezawa, chief fixed income strategist at Daiwa Securities SMBC.
"But with the FOMC coming up, movements should be limited." September futures were 0.07 point higher at 131.85 in early trading, recovering from 131.56 on Tuesday, the contract's lowest level since September 2000. The 10-year yield slipped a basis point to 1.890 percent, after climbing to 1.915 percent in the previous session.
The two-year yield was also down a basis point at 0.830 percent, supported by strong demand at an auction in the maturity on Tuesday.
The Nikkei share average fell 1.55 percent in the morning session.
US Treasuries rose for the first time in nearly two weeks on Tuesday after investors crept back into the market following a recent sell-off due to the likelihood that the Fed will raise rates by 25 basis points to 5.25 percent on Thursday.
Analysts said that the JGB market was also receiving some support from the growing possibility that BOJ Governor Toshihiko Fukui could step down over an investment scandal, although many in the market believe that any resignation would be unlikely to delay a rate rise.
Japanese Prime Minister Junichiro Koizumi on Wednesday reiterated his support for Fukui, stating during a visit to Canada that there was no change in his view that Fukui should not resign.