10-year JGB yield sinks below 1% / Benchmark issue ends at 7-year low

The Yomiuri Shimbun

The yield on the benchmark 10-year Japanese government bond closed below the 1 percent threshold Wednesday as concern over the global economic slowdown grows both at home and abroad, prompting investors to seek safety in government bonds.

The yield on the No. 309, 1.1 percent issue, a key indicator of long-term interest rates, ended the day at 0.995 percent, down 0.04 percentage point from Tuesday's close and falling below the 1 percent mark for the first time since August 2003.

Meanwhile, the U.S. dollar traded at the lower 85 yen range early Wednesday in Tokyo over concern about the U.S. economic outlook. At 5 p.m., the dollar traded at 85.52-85.53 yen, compared with Tuesday's 5 p.m. quotes of 85.98-86 yen in Tokyo.

Reflecting the rise in the yen, Tokyo stocks, particularly exporter stocks, dropped Wednesday. The 225-issue Nikkei Stock Average lost 204.67, or 2.11 percent, from Tuesday to 9,489.34, falling below the 9,500 mark for the first time in six trading days. Investment funds seem to have gone to safe-haven government bonds.

Long-term interest rates have been on the decline since May. This is due to continued capital flight from high-risk assets such as stocks triggered by the debt crisis in Europe, such as the problems seen in Greece.

Since July, concern over the U.S. economic slowdown has grown. U.S. Federal Reserve Board Chairman Ben Bernanke told Congress last month that the economic outlook is "unusually uncertain." The U.S. gross domestic product in the April-June quarter grew at a 2.4 percent annual rate, a marked decline from the 3.7 percent growth posted in the January-March quarter, according to the U.S. Commerce Department.

Global investment capital has increasingly been flowing to low-risk assets. The yield on the benchmark 10-year U.S. government bond has been closing below 3 percent recently. It closed at 2.91 percent per annum Tuesday, 0.05 percentage point lower than Monday's finish.

In Japan, lending by financial institutions has been sluggish, prodding them to increase holdings of safe-haven bonds, which pushes down long-term interest rates. It is possible long-term interest rates will fall further. Akitsugu Bando, senior economist at Okasan Securities Co., said rates may fall as low as 0.95 percent.

Meanwhile, an official at a leading securities company said there was also a possibility that government bonds would be sold off if pessimism over the economic outlook eased.

Deflation worry in the West

However, concern over deflation has arisen even in the United States and Europe. "All of the major economies are about to enter a low-growth period," a market official said

Since the collapse of Lehman Brothers in 2008, private households and businesses have been saddled with massive debts, making it difficult for new demand to be generated. The same official said other major economies might fall into a protracted period of economic stagnation, similar to what Japan has been experiencing.

Concern over economic slowdown is also rising domestically. Koichi Haji, head of the economic research division at NLI Research Institute, said, "The appearance of bright economic prospects is more important than declines in interest rates."

Declines in long-term interest rates will lead to lower interest rates on housing loans for individuals and on loans to businesses. However, such declines may not immediately lead to a rise in demand for funds by businesses, causing only a limited stimulatory effect on the greater economy.