Japanese government bonds erased earlier gains and fell on Thursday as investors sold bonds to buy shares, while a Bank of Japan official's remarks raised concerns about another rate increase.
JGB futures briefly dipped to the day's lows after comments by Bank of Japan Deputy Governor Toshiro Muto, which traders said were taken as not ruling out another rate rise during the fiscal year to next March.
Muto repeated comments from earlier in the session that he has no preset idea on whether the central bank will raise rates by the year-end. He said he does not believe US pre-Christmas consumption will decide the timing of the BoJ's policy move. "The comments were taken as an indication that the BoJ will raise interest rates in the first quarter of 2007," said a trader at a big Japanese bank.
Muto said earlier the Japanese economy was moving largely in line with the central bank's views in its twice-yearly outlook report issued in April. The BoJ raised rates for the first time in six years in July.
"That comment was also taken to signal one more BoJ rate increase during the current fiscal year," said Tatsuo Ichikawa, chief JGB strategist at ABN Amro.
The BoJ's April report incorporated the possibility of two to three rate rises during the current financial year, and if the economy was moving in line with that outlook it could be assumed there would be another rate increase before March, Ichikawa said.
December 10-year JGB futures ended the day session down 0.12 point at 134.44, recovering from a low of 134.31 hit after Muto's comments. The benchmark 10-year JGB yield briefly rose to 1.735 percent but eased back to 1.725 percent, up 0.5 basis point. The 20-year yield rose 0.5 basis point to 2.225 percent while two-year yields rose one basis point to 0.655 percent.