TAX NEWS - June 2010

Japan Bonds: Japan 10-Year Yield Hits 7-Year Low

TOKYO — The benchmark 10-year Japanese government bond yield fell to a seven-year low on Thursday as hopes grow that the country's new government will improve the country's finances.

The 10-year yield fell 0.025 percentage points to 1.14%, its lowest level since August 2003.

Analysts say many investors welcome Prime Minister Naoto Kan's proposal for sales-tax hikes to cut the government's deficit. If expectations grow that the ruling Democratic Party of Japan will win big in the Upper House elections on July 11, paving the way for tax increases, demand for 10-year bonds could keep increasing, they added.

"Many vigorous discussions about consumption-tax hikes have accelerated declines in the 10-year JGB yield," Mizuho Securities senior market analyst Makoto Noji said.

The DPJ-led government has pledged to balance the nation's main budget over the coming decade under its first fiscal overhaul plan approved Tuesday, and Mr. Kan recently proposed doubling the country's consumption tax rate to 10%.

Such moves have driven down yields across the board. Thursday, the 20-year yield dropped 0.04 percentage points to 1.89% and the 30-year yield slid 0.045 percentage points to 1.95%.

However, some traders don't expect the trend to last long, saying the Kan administration has yet to provide details of how it can accomplish fiscal reform, and it remains uncertain whether the government really can lift the sales tax.

"Given that consumption tax hikes are unpopular with voters, the DPJ may lose the coming Upper House elections," a trader at a Tokyo securities house said. "If the DPJ gives up raising the sales-tax rate, skepticism about Japan's fiscal rehabilitation could grow, pushing JGB yields up sharply."

Elsewhere, demand was firm at an auction of two-year notes. The government sold 2.406 trillion yen ($26.77 billion) of the 0.2% bonds with the lowest price of 100.09, in line with traders' predictions. The bonds yielded 0.154% at the lowest price, and 0.153% at an average price of 100.092.