Japan long-term rate hits 7-yr high amid warnings

TOKYO, Apr 18: Japan's 10-year government bond yield hit the psychologically key 2 percent level for the first time in nearly seven years on Tuesday, despite government warnings against recent surges in long-term rates.

The jump in 10-year JGB yields comes as investors brace for the Bank of Japan to begin lifting short-term rates later this year for the first time since August 2000 in response to the economy's expansion and the end of deflation.

Several hours before the 10-year yield hit 2.0 percent, Finance Minister Sadakazu Tanigaki expressed concern about recent rises in government bond yields and put pressure on the central bank to make clear that it would keep an accommodative stance.

Noting that one factor in the rise in long-term interest rates was speculation of successive interest rate hikes, Tanigaki said the Bank of Japan needed to explain its policy better.

''I'm concerned that the speed of recent rises is a bit fast,'' he told a news conference.

''The BOJ decided at its March 9 policy-setting meeting that low interest rates could be maintained for some time,'' he said.

''Markets are not understanding that properly, and the BOJ needs to work to make sure it is properly understood.'' Shortly after the 10-year yield hit 2 percent, a finance ministry official called the latest rise ''too rapid'' -- somewhat stronger wording than Tanigaki's recent warnings. Tanigaki has been saying the movements were ''a bit fast''.

''With a mild deflation persisting, rapid rises in rates would undermine the economy and are undesirable. Our view is that the recent rises have been too rapid,'' the official told Reuters.

The yield on the benchmark 10-year Japanese government bond briefly rose to 2.000 percent, its highest since August 1999, before pulling back to around 1.965 percent at 0515 GMT.

In addition to the impact on the economy, the Ministry of Finance is worried that rises in long-term rates would raise the costs of funding public debt, which stands at some 150 percent of gross domestic product -- the highest among industrial nations.

BOJ REMAINS COY

Speaking separately at a branch managers' meeting, Bank of Japan Governor Toshihiko Fukui gave few clues about the timing of any future rate hike, only restating that the BOJ is committed to supporting the economy's long-term growth via appropriate policy.

''We will continue to support sustainable growth under stable prices by conducting monetary policy appropriately in line with changes in economic and price conditions,'' he said.

The BOJ ended its five-year-old super-loose monetary policy last month, reverting to a traditional policy targeting short-term interest rates which are now pegged near zero.

But a strengthening economy and rising prices have raised speculation the BOJ may lift short-term interest rates soon after it finishes absorbing excess liquidity from the market by June.

In a summary of quarterly reports by BOJ regional branch managers, the BOJ said local economies were in a steady recovery.

A BOJ official said the reports had yet to cite any impact of the BOJ's policy shift last month on local business activity.

Tanigaki said rising global interest rates and high oil prices, which hit the highest level in 7-{ months on Tuesday, would be topics when finance ministers and central bankers from Group of Seven industrial nations meet in Washington on Friday.

The BOJ will likely be in the spotlight when those leaders discuss rising global interest rates, now that the BOJ has joined its U.S. and European counterparts on the path of monetary tightening.

REUTERS