By Theresa Barraclough March 31 (Bloomberg) -- Japanese government bonds fell, heading for the biggest monthly drop since October, on speculation the Bank of Japan’sTankan confidence survey tomorrow will add to signs the recovery is gaining momentum. Ten-year yields climbed to match the highest level in more than four months on forecasts for business sentiment to reach the highest since September 2008. Prime Minister Yukio Hatoyama said a plan to raise the cap for individual deposits held at Japan Post Bank Co. to 20 million yen ($215,000) won’t cause it “to simply become a government bond underwriter.” “It’s tricky for investors to move before the Tankan,” said RuiXue Xu, a rates strategist in Tokyo at RBS Securities Japan Ltd. “The Tankan will be a good gauge of economic recovery. A robust outcome will add further upward pressure to the yields.” The yield on the 1.4 percent security due March 2020 rose one basis point, or 0.01 percentage point, to 1.4 percent as of 12:56 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price dropped 0.087 yen to 100. Yields have climbed from 1.3 percent on Feb. 26 and 1.285 percent on Dec. 30. Ten-year bond futures for June delivery sank 0.12 to 138.12 at the Tokyo Stock Exchange. The Tankan index improved to minus 14 in March, from December’s minus 24, according to the median estimate of economists in a Bloomberg survey. That would be the best since a minus 3 reading in September 2008. The report is due for release tomorrow at 8:50 a.m. in Tokyo. “The moves are somewhat muted before the Tankan,” said Shuntaro Take, a Tokyo-based portfolio manager at Tokio Marine & Nichido Fire Insurance Co., a unit of Japan’s biggest casualty insurer. ‘Buying Institution’ Japanese bonds have handed investors losses of 0.22 percent this month and 0.15 percent this quarter, according to Bank of America Corp.’s Merrill Lynch unit. Hatoyama’s remark was “an unusual, perhaps political, comment in that Japan post is a JGB-buying institution and has been increasing its JGB portfolio allocation even as its deposit liabilities have decreased sharply since 2007,” said Christian Carrillo, a senior interest-rate strategist in Tokyo at Societe Generale SA. “Going forward we expect Japan Post’s JGB buying capacity to be constrained unless suggested policy changes lead to an increase in its deposit liabilities.” Japan Post Holding Co. is the biggest holder of the nation’s government bonds, with 158.5 trillion yen of the securities at the banking unit and 67.7 trillion yen at its insurance company, according to data from December and January. Month-End Demand The decline in bonds was limited on speculation money managers bought the debt to match an index used to gauge performance. Nomura Securities Co. increased the average duration of its Bond Performance Index by 0.06 year to 6.57 years into next month, according to its Web site. “Longer-dated bonds will be supported by month-end demand,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second- largest bank. Money managers including the Government Pension Investment Fund, which runs the world’s largest pool of retirement wealth, use indexes such as Nomura’s to help decide holdings. Duration is a gauge of how much a change in yield affects a bond’s price. The 10-year yield’s range is likely to shift up from spring onwards, pushing yields up to as high as 1.5 percent by the end of June, according to UBS Securities Japan Ltd. ‘Fiscal Risk Premium’ “The increasing fiscal risk premium is bound to push yields up,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities, one of the 23 primary dealers that are required to bid at government debt sales. “The pace at which banks buy JGBs will probably slow.” The Ministry of Finance said in December it will boost total issuance to a record 144.3 trillion yen in the year starting tomorrow. Japan’s national debt will increase to 973 trillion yen by the end of March 2011, the Ministry of Finance said in January. The debt level may rise to 246 percent of gross domestic product by 2014, according to the International Monetary Fund. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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