Tokyo Market: Bonds to rise as banks keep cash flowing

JAPAN'S benchmark stock index is likely to trade between 16,500 and 16,900 this week as investors grapple with a flood of corporate results. Bonds are likely to rise as the central bank keeps the banking system flush with cash, pushing down rates and allowing banks to buy bonds with overnight loans borrowed at almost no cost.

The central bank's policy of adding funds to the banking system is the main reason why bond yields have fallen from 2.44 per cent in February, which was the highest level since July 1997. There is concern over increased bond sales and the government's reduced role in the market. Investors who bought 10-year bonds three months ago are getting a total return of 10.9 per cent.

"Yields are pretty low, but further gains are possible next week as the central bank keeps pumping money into the system," said Takeshi Naito, economist at Daiwa SB Capital Markets.

Last week the benchmark 10-year bond yield fell 7.5 basis points to 1.24 per cent, the lowest level since December. Central bank governors are not expected to change their zero-rate policy at a meeting on Tuesday, and next Friday's publication of the minutes of 9 April policy board meeting is not expected to undermine confidence that the BOJ will maintain its current generous stance.

Matushita Electric, Obayashi, DDI - Japan's number three telecommunications carrier - and Minolta, originator of the auto-focus single lens reflex camera, are but a handful of more than 1,000 companies posting annual earnings this week.

"Next week will be earnings, earnings, earnings," said Celia Farnon, a equity saleswoman at Nomura Securities. "We're all going to be suffering badly from earnings indigestion and earnings fatigue."

The Nikkei ended last week lower, for a second week in three, trading within a 370-point range over the five days. The index fell 0.8 per cent to 16,946.52.

Critical for the market's health is the corporate profit outlook for the current year. "In general, the expectations are not that high for earnings forecasts," said Farnon. "But if they're even worse than their fairly low expectations, that would put some downward pressure on the market."

A weekend meeting of finance ministers from the G-7 countries is unlikely to have little direct impact on equities, unless the currency moves dramatically.

Investors will also watch the US Federal Reserve's open market committee, which meets on Tuesday. An increase in interest rates, while seen as unlikely, could pull down US stocks and Japanese shares as well.