By Theresa Barraclough Oct. 24 (Bloomberg) -- Japanese 10-year bonds headed for the biggest weekly gain since June as a global rout in stocks wiped out more than $10 trillion of market value this month. The notes climbed for a fourth day after Sony Corp. cut its annual earnings target by more than half, sending the Nikkei 225 Stock Average down almost 5 percent. Demand for shorter-maturity debt increased on mounting speculation the Bank of Japan will lower interest rates to prevent a prolonged recession. ``JGBs are relatively attractive,'' said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo. ``The decline in corporate-sector performance will weigh on domestic stocks.'' The yield on the 1.5 percent bond due September 2018 fell 5.5 basis points to 1.45 percent as of 2 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.476 yen to 100.432 yen. Yields dropped 12 basis points this week. A basis point is 0.01 percentage point. Five-year yields declined 2 basis points to 1.03 percent and slid 11 basis points since last week. Ten-year bond futures for December delivery gained 0.57 to 137.68 in Tokyo. Sony, the world's second-biggest maker of consumer electronics, yesterday slashed its forecast for annual operating profit by 57 percent, citing the stronger yen and worsening market conditions for televisions and digital cameras. The yen has climbed almost 12 percent against the dollar over the past three months, the sole gainer among the 16 most- actively traded currencies. The Nikkei dropped to 7,867.20, falling below 8,000 for the first time since May 2003. Stock Losses ``Should the Nikkei fall below 8,000, 10-year yields will decline to 1.4 percent,'' said Koji Ochiai, a senior market economist at Mizuho Investors Securities Co. Ltd. in Tokyo. Japan's bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.97 with the Nikkei 225 so far this week, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep. The gain in longer-dated bonds may be limited on speculation the government will issue additional debt to finance an economic stimulus package, according to Principal Global Investors. Twenty-year yields have increased half a basis point this week to 2.15 percent. ``People are staying away from the long end,'' said Guthrie Williamson, portfolio manager in Sydney at PGI, which manages $244.9 billion in assets globally. ``The absorption will drive the market in the short term.'' The government will compile a second economic stimulus package by the end of the month after having drafted a 2 trillion yen ($20.8 billion) plan in August. Finance Minister Shoichi Nakagawa said on Oct. 21 that selling bonds to pay for an additional package remains an option. Rate-Cut Odds There is a 26 percent chance the Bank of Japan will lower its benchmark rate to 0.25 percent from 0.5 percent by year-end, up from 3 percent odds a month ago, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. ``With the yen advancing and stocks falling, concerns about Japan's financial system and economy are mounting,'' said Jun Fukashiro, senior fund manager at Toyota Asset Management Co. in Tokyo. ``A rate cut seems unavoidable.'' The government this week acknowledged Japan has probably entered its first recession in six years after the economy shrank in the second quarter and factory output, machine orders and household spending fell in August. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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