Japanese government bonds (JGBs) gained on Friday, with the 20-year bond yield declining to a five-year low, as the yield curve flattened on the back of a worsening outlook for the economy and easing steps announced by the Bank of Japan last week.
Bonds dipped slightly earlier in response to advancing Tokyo shares but trimmed losses as investor demand for long-dated debt, which has been strong all week, eventually prevailed.
JGBs were propped up by the latest set of grim data that painted a bleak picture of a Japanese economy sinking deeper into recession and seemingly edging back towards deflation.
Indicators released on Friday showed November industrial production plunge a record 8.1 percent from the previous month as companies halted factory lines to deal with a sudden contraction in global demand, while annual core consumer inflation slowed sharply, to 1.0 percent from 1.9 percent the month before.
Other reports showed a rise in Japan's jobless rate and a drop in household spending. JGB yields were given a further push lower as the curve-flattening momentum seen through the week remained intact, albeit in thin market conditions.
"The discouraging economic indicators released today supported maturities of up to 10 years," said Takafumi Yamawaki, a senior fixed-income strategist at BNP Paribas.
"On the other hand, the BOJ's decision to increase the amount of JGBs it buys outright continued to funnel investor bids into the super longs," Yamawaki said. The JGB yield curve has flattened extensively this week as demand for long-dated bonds increased after last week's interest rate cut and other easing measures by the Bank of Japan in a bid to help the struggling economy.
Among the measures the BOJ introduced was an increase in the amount of JGBs it buys outright from the market to 1.4 trillion yen ($15.5 billion) per month from 1.2 trillion yen.
The BOJ also said it would start buying 30-year JGBs as part of its outright purchases, which was a positive surprise for some participants. The 20-year yield declined 6.5 basis points to 1.755 percent on Friday, the lowest since December 2003.
The 10-year yield fell 1 basis point to 1.200 percent. Traders said midterm JGBs were capped as some participants sold the maturities to buy long-dated bonds. The five-year yield inched down 0.5 basis point to 0.730 percent. March 10-year futures slipped 0.21 point to 139.49 as the Nikkei stock average gained more than 1 percent.