By Theresa Barraclough Oct. 3 (Bloomberg) -- Japan's five-year government notes advanced by the most in more than two weeks on speculation central banks in Europe, Japan and the U.S. will cut interest rates this year to avert a global recession. The notes completed a second week of gains as European Central Bank President Jean-Claude Trichet yesterday said policy makers discussed cutting interest rates on signs growth is ``weakening.'' The Bank of Japan pumped 800 billion ($7.6 billion) into the financial system today to free up capital. ``The theme is changing to the economic deterioration and expectations of an interest-rate cut,'' said Nobuto Yamazaki, executive fund manager at Diam Asset Management Co. Ltd. in Tokyo. ``As economies slow and inflation settles, it is natural to expect a reduction in borrowing costs by central banks.'' The yield on the 1.1 percent bond due September 2013 fell 6.5 basis points, the most since Sept. 16, to 0.98 percent as of 3:02 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.307 yen to 100.566 yen. The yield has fallen 11.5 basis points this week. Ten-year yields declined 7 basis points to 1.45 percent. A basis point is 0.01 percentage point. Ten-year bond futures for December delivery gained 0.44 to 137.68 as of the afternoon close at the Tokyo Stock Exchange. The yield on the 10-year German bund fell 6 basis points to 3.93 percent yesterday after the ECB kept interest rates unchanged at 4.25 percent. Its yield advantage over similar- maturity Japanese debt was at 2.41 percentage points yesterday, the lowest in 4 1/2 months. High Uncertainty ``There is an exceptionally high level of uncertainty'' stemming from the credit-market turmoil, and as a result, ``upside risks to price stability have diminished somewhat, but have not disappeared,'' Trichet said at a press briefing in Frankfurt after the ECB rate decision. Speculation the U.S. Federal Reserve will also lower borrowing costs increased after a government report showed first-time jobless claims rose to a seven-year high. ``Expectations of rate cuts in Europe and the U.S. will increase speculation of a coordinated effort that includes the BOJ,'' said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., a Japanese unit of the world's biggest bank by assets. Fund Injections Japan's overnight call loan rate traded at 0.50 percent, from 0.46 percent before the BOJ operation, according to Tokyo Tanshi Co. The BOJ has poured more than 20 trillion yen into Japan's banking system over the past two weeks, the most in at least six years, amid the global credit freeze. A shortage of dollar credit is forcing foreign banks to pay 0.73 percent for overnight loans in yen, while Japan's banks pay 0.44 percent. The BOJ's interest-rate target is 0.5 percent. ``The BOJ will have to continue injecting money into the market,'' said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets. ``There is a limit to what the BOJ can do, as a lot of investors are avoiding foreign banks at the moment.'' The central bank may lower its growth forecasts to zero for this fiscal year ending March, the Nikkei newspaper said yesterday, without citing sources. In July, the BOJ cut its growth forecast to 1.2 percent from 1.5 percent. Stock Losses A central bank survey this week showed Japan's manufacturers are the most pessimistic in five years. Other reports this week showed industrial production fell at the fastest pace in five years in August, household spending dropped for a sixth month and the jobless rate reached a two-year high. There is a 30 percent chance the central bank will reduce its target rate to 0.25 percent by year-end, according to calculations by JPMorgan Chase & Co. using overnight swaps. Bonds also gained as Japan's Nikkei 225 Stock Average fell below 11,000 for the first time in more than three years, boosting demand for the safe-haven of government debt. ``Weaker equities means you are left with government bonds,'' Fukoku's Sakurai said. Benchmark bonds handed investors a return of about 1 percent in the three months ended Sept. 30, according to indexes compiled by Merrill Lynch & Co. The Nikkei lost 16 percent in the same period. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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