Japan’s five-year notes rose the most in more than two years as investors sought the relative safety of government debt after the nation’s strongest earthquake on record triggered a nuclear crisis. The extra yield investors demand to hold Japan’s 30-year bonds instead of five-year notes rose to a three-month high on concern the country will sell more debt to finance reconstruction. The Bank of Japan today said it will buy more government debt to “enhance” monetary easing. Bonds with longer maturities fell as costs surged to protect Japanese debt from nonpayment. “Bonds in the shorter end will be strong as the BOJ won’t now exit its easing policy for the time being,” said Yuuki Sakurai, president at Fukoku Capital Management Inc., which manages the equivalent of $8.6 billion in Tokyo. “People don’t want to buy the longer end because of its lower liquidity and concern about an increase in bond issuance.” Five-year yields dropped nine basis points to 0.475 percent, the biggest slide since October 2008, as of 3:47 p.m. in Tokyo at Japan Bond Trading Co. The yield spread between 30- year bonds and five-year notes climbed to 1.715 percentage points, the most since Dec. 7. Thirty-year yields rose 1.5 basis points to 2.19 percent. The benchmark 10-year yield sank seven basis points to 1.2 percent. The 1.3 percent security due March 2021 added 0.626 yen to 100.892 yen. Ten-year bond futures for June delivery climbed 0.72 to 139.92 at the 3 p.m. close of the Tokyo Stock Exchange. The Nikkei 225 Stock Average tumbled 6.2 percent, the most since December 2008. Nuclear Plants Three-month euroyen futures due December touched the highest since October. That prompted the Tokyo Financial Exchange to ask for more deposits from participants whose deposits fell short of the required amount for interest rate- futures trading. The magnitude-8.9 earthquake on March 11 triggered a tsunami that swept as far as 20 kilometers (12.4 miles) inland along the northern coast. Radiation levels rose around the Tokyo Electric Power Co. station in Fukushima, 135 miles north (217 kilometers) of the capital, after cooling systems at a second reactor failed, heightening concerns about a possible meltdown. Chief Cabinet Secretary Yukio Edano said the government would use 200 billion yen ($2.44 billion) of money left over from the budget for the fiscal year ending March 31 to start an extra spending package. Five-year swaps insuring Japanese sovereign debt against default jumped 13 basis points to 92 basis points, according to Deutsche Bank AG. That’s the biggest increase since February 2009, prices from data provider CMA in New York show. BOJ Measures Japan may “at some point” reach a fiscal “tipping point” if the market loses confidence in the soundness of government finances and demands a risk premium on government bonds, Tom Byrne, a senior vice president at Moody’s Investors Service, wrote in an e-mailed note today. Moody’s last month lowered its outlook on the country’s credit rating. Bank of Japan Governor Masaaki Shirakawa and his board today decided to double to 10 trillion yen a fund that buys government bonds, corporate debt, exchange-traded funds and other assets. The central bank also pumped 15 trillion yen into the financial system, a record for same-day operations. The yen earlier appreciated to 80.62 per dollar, the highest since Nov. 9. A stronger yen reduces the value of overseas earnings at Japanese companies when repatriated. “The steps are intended to reassure the financial market,” said Yasunari Ueno, chief market economist in Tokyo at Mizuho Securities Co. “The BOJ is apparently aiming to contain the yen’s appreciation, as it drives down stock prices, worsening the situation.” Insurance Costs The damage caused by the earthquake may reach 15 trillion yen, Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former BOJ official, wrote in a report today. The government may spend about 2 trillion yen for reconstruction, he wrote. Liquidity from the central bank may fail to prevent yields from rising as pressure mounts on insurance companies and Prime Minister Naoto Kan’s administration to sell bonds to pay for reconstruction. “Rebuilding after the Kobe quake was a significant strain on the budget, and the cleanup and rebuilding cost is likely to be even higher this time,” Chris Low, chief economist at FTN Financial in New York, wrote in a research note on March 11. Yields on 10-year debt “are likely to increase as much as 50 basis points or more over the next year,” he wrote. In the five trading days after a 6.9-magnitude earthquake struck Kobe, western Japan, in January 1995 killing more than 6,000 people, yields rose eight basis points to 4.73 percent. To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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