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UPDATE 3-Japan says to issue $110 bln bonds for stimulus

Published 04/21/2009, 06:07 AM
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* Japan plans 10.8 trln yen bond issuance in extra budget

* Draft shows may be further issuance in govt agency debt

* Govt to cut 09/10 econ forecast to 3 pct contraction-media

* Bonds firm as 20-year JGB auction goes smoothly

By Tetsushi Kajimoto

TOKYO, April 21 (Reuters) - The Japanese government said on Tuesday it would issue bonds worth $110 billion to fund its planned stimulus package, but bond market analysts said they expected much higher government borrowing this year.

The extra bonds announced will raise new issuance by a third this fiscal year to a record 44 trillion yen, raising concerns among investors about how the market will cope with the additional supply and helping push up bond yield spreads.

Total new issuance may eventually amount to 16.9 trillion yen ($172 billion) in new bonds, a government draft obtained by Reuters on Monday showed, but a government official said decisions on some bonds -- for government agencies -- had not yet been made.

The new issuance including the 10.8 trillion yen announced on Tuesday tops 8 percent of gross domestic product as Japan joins other nations in big increases in stimulus spending.

Budget deficits in the United States and Britain are seen at around 10 percent of GDP for 2009.

The bond issuance and stimulus plan comes as official agencies look to revise down Japan's growth outlook due to plunging exports and capital investment and sagging domestic demand.

Reflecting a sharp deterioration in the economy, the government is set to cut its forecast for the fiscal year to next March to a 3 percent contraction, Japanese media said, from a forecast for flat growth issued in December.

That is still more optimistic than private-sector forecasters, who in a Reuters poll saw a 4.5 percent contraction.

A official at the Cabinet Office, which is in charge of economic forecasts, said that the government had not finished revising its outlook but that it would be issued before the usual date in July.

SMOOTH AUCTION

A 20-year government bond auction went smoothly on Tuesday, supported by Japanese institutional investors such as life insurers who buy longer-term bonds at the beginning of the new financial year from April.

But market analysts said supply worries would likely resurface once auctions include the additional borrowing, expected from July.

Supply concerns have lifted longer-dated yields more than shorter-dated ones, pushing the yield spread between two- and 20-year bonds to a three-year high of 174.5 basis points on Monday.

"The JGB market has factored in issuance of around 16-17 trillion yen," said Tatsuo Ichikawa, a fixed-income strategist at RBS Securities.

"The market is expected to refocus on supply when we have actual auctions for the new issuance after a few months."

For a graphic showing JGB yield spreads between two- and 20-year bonds, click on http://graphics.thomsonreuters.com/apr09/JP_GBNC0409.jpg

Japanese government bonds rose on Tuesday, tracking gains in U.S. Treasury debt prices after renewed worries about Bank of America hammered Wall Street and spurred appetite for bonds.

The Ministry of Finance auctioned 900 billion yen of 20-year bonds with a 2.1 percent coupon, higher than the 1.9 percent offered at the previous auction of JGBs with the same maturity.

June 10-year JGB futures hit a two-week high of 137.16 after the auction, up 0.53 point for the day.

Finance Minister Kaoru Yosano said the finance ministry would be careful in issuing bonds so as not to affect the JGB market.

"Depending on how we issue bonds, it could have an unexpected impact on the market," Yosano told a news conference after a cabinet meeting.

"So we'll be careful about it and are determined to issue in a way that will not bring about unexpected impacts on the market while stepping up dialogue with market players."

DOWNGRADING FORECAST

The government will cut its economic forecast for the current fiscal year to March 2010 to a 3 percent contraction, the Nikkei business daily and other Japanese media reported.

In January it forecast a 0.8 percent contraction for 2008/09, which ended on March 31, and flat growth for this fiscal year.

The International Monetary Fund said last month that the Japanese economy, the world's second largest, would likely suffer a 5.8 percent contraction in calendar 2009 and shrink a further 0.2 percent in 2010.

The Bank of Japan is also likely to cut its forecasts for the economy in a half-yearly outlook report at the end of April.

In its January review, the central bank said the economy would contract 2.0 percent this fiscal year.

To battle the lengthy recession, Japan announced this month a record 15.4 trillion yen stimulus package, with which it hopes to raise gross domestic product by 2 percentage points. ($1=98.20 Yen) (Additional reporting by Charlotte Cooper, Rika Otsuka, Yuzo Saeki, Yuko Yoshikawa; Editing by Chris Gallagher)

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