By Theresa Barraclough Oct. 9 (Bloomberg) -- Japan's bonds fell on speculation the government will issue additional debt after the lower house approved a 1.8 trillion yen ($18 billion) supplementary budget to fund an economic-stimulus plan. Issuing deficit-covering bonds and construction bonds may be ``unavoidable,'' Liberal Democratic Party Policy Chief Kosuke Hori told reporters in Tokyo today. The government is drafting a new economic stimulus in addition to the one approved yesterday, Hori said. A government report today showed machinery orders dropped by more than five times what economists expected. ``If growth slows, tax revenue will go down and the government will need to issue more debt to cover the fiscal deficit or finance a possible fiscal stimulus plan,'' said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets, in Tokyo. ``The government needs more money to combat the financial crisis.'' The yield on the 1.5 percent bond due September 2018 rose 5.5 basis points to 1.44 percent as of 2:01 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.483 yen to 100.521 yen. Twenty-year yields added 6 basis points to 2.03 percent. Ten-year bond futures for December delivery lost 0.97 to 138.58 at the Tokyo Stock Exchange. U.S. notes also declined before the Treasury Department sells $20 billion of debt in a second round of emergency auctions today to relieve a shortage of the securities caused by the credit crisis. Ten-year yields climbed 5 basis points to 3.7 percent. Economic Measures Japan's 10-year yields are likely to rise to 1.52 percent by year-end, according to a Bloomberg News survey. The estimate puts a heavier weighting on more recent forecasts. The new budget plan may include public works projects and tax breaks to encourage securities trading, the LDP's Hori told reporters. Hori said he was briefed on the plan by Japanese Prime Minister Taro Aso. ``Economic measures have become super urgent,'' LDP Policy Chief Hori said. ``We need to respond accordingly to recent developments.'' Equipment orders, which signal capital spending in the next three to six months, fell 14.5 percent in August, the third month of declines, the Cabinet Office said in Tokyo today. The median estimate of 33 economists surveyed by Bloomberg News was for a decline of 2.8 percent. Bonds fell after the Federal Reserve, European Central Bank and four other central banks yesterday lowered rates in an unprecedented, emergency coordinated bid to ease the economic effects of the financial crisis. Central banks in South Korea, Taiwan and Hong Kong also reduced borrowing costs today. Fund Injection The coordinated rate cut is ``definitely good for sentiment, said Tomohiko Katsu, deputy general manager of the capital market division at Shinsei Bank Ltd. in Tokyo. ``The message from the central banks is clear -- they will do anything to recover from the confidence crisis.'' The Bank of Japan said it supported the joint interest-rate cuts, though declined to join them, saying its borrowing costs are already ``very low.'' The best way for central banks to counter the global financial crisis is to provide liquidity, Governor Masaaki Shirakawa said on Oct. 7. The central bank injected 4 trillion yen into the financial system today. Japan's overnight call loan rate was at 0.53 percent after the operation at 9:20 a.m. in Tokyo, from 0.575 percent before the injection, according to Tokyo Tanshi Co. The BOJ has pumped more than 25 trillion yen into the banking system over the past three weeks, the most in at least six years. IMF Cuts Forecasts The decline in bonds may be limited after the International Monetary Fund cut its growth forecast for the world's advanced economies next year to the slowest pace since 1982. Industrial economies will expand 0.5 percent in 2009, down from 1.5 percent this year, the Washington-based IMF said in its World Economic Outlook yesterday. Japan's economy shrank 3 percent in the three months ended June 30, the steepest contraction since 2001, the Cabinet Office said last month. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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