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JGBs off lows as Nikkei stumbles before key level

TOKYO: The key March 10-year Japanese government bond (JGB) futures contract was down at midday in Tokyo on Monday, but was off its earlier low as Tokyo share price gains were halted before reaching key resistance.

JGBs also drew some support from weekend comments by Economic Planning Minister Taichi Sakaiya saying that Japan's gross domestic product for the October-December quarter is likely to have contracted from the previous quarter.

The March contract: ended the morning session down 0.09 point at 132.46, after earlier slipping as low as 132.27.

The yield of the key 1.7 percent 220th 10-year stood at 1.825 percent at midday, compared with 1.815 percent late on Friday in Tokyo.

"The market opened down on expectations that stocks would perform strongly today," said a trader at a Japanese bank's securities unit. "But JGBs were quickly bought back as the Nikkei failed to reach 20,000." The Nikkei stock average ended Monday's morning session up 111.86 points or 0.57 percent at 19,874.99.

The key stock index on Friday briefly rose above 20,000 for the first time in 30 months, but it failed to touch that mark on Monday morning.

A strong equity market is seen as negative for bonds as it would have stimulative effects on consumption, which accounts for some 60 percent of Japan's. The market showed little interest in the results of local elections in Osaka and Kyoto on Sunday, which were won by candidates backed by the ruling coalition.

"Political pundits are saying the outcome has increased the chances of an early general election," said a city bank trader. "An early poll could produce more market volatility by increasing near-term political uncertainty," he added.

The Bank of Japan's Policy Board is scheduled to meet on Thursday.

While the BOJ is not expected to change its policy, the market will scrutinise Japan's December machinery orders data to be released on Thursday, for clues to the timing of a possible change in the BOJ's zero-rate policy in the future, traders said.

"The forecast portion for the January-March orders in Thursday's data will be closely watched, as a positive figure would mean three consecutive quarters of orders increases," said Naka Matsuzawa, an investment strategist at Nomura Securities.

But the city bank trader said a mildly strong January-March orders forecast was unlikely to trigger a JGB sell-off.

"Judging from comments by Sakaiya, a near-term end to the BOJ's zero interest rate policy seems quite unlikely," the trader said.

Sakaiya said on a television programme on Sunday that October-December growth would be on the minus side due to sluggish consumer spending.

Elsewhere, key September TIBOR-based euroyen futures stood at 99.685 at midday, unchanged from Friday's settlement.-Reuters