By Yuriko Nakao
TOKYO, July 16 - Japanese government bond (JGB) prices edged lower on Monday morning after Prime Minister Junichiro Koizumi hinted at the weekend that he may consider an extra budget for the current fiscal year, dealers said.
The question of whether the government would come up with an extra budget in the face of a worsening slowdown in the economy has been putting pressure on the JGB market in the past few weeks.
With calls for more fiscal stimulus measures likely to grow louder when key economic data is released in the autumn, market players became less confident that the government would be able to keep its pledge of limiting new JGB issuance for next fiscal year at 30 trillion yen ($240.3 billion), traders said.
Those fears were heightened last Friday, with Finance Minister Masajuro Shiokawa repeating the government would take all measures to avoid an economic contraction.
"Uncertainty over whether Koizumi can keep his vow of reforms is keeping the market from chasing JGBs up," said Masaaki Mizuno, chief strategist at Dresdner Kleinwort Wasserstein.
Speaking on a nationally televised programme on Sunday, Koizumi said that if fiscal spending became necessary, his administration would still not resort to traditional pump-priming that has left the country with the highest debt load among the major industrialised nations.
But some dealers said the market's focus was on the total value of the extra budget and how much of bonds would need to be issued, rather than the contents of the budget.
"The amount of the JGB issuance is what will decide the impact on the market. If more JGBs are issued than what most dealers expect -- no more than two trillion yen -- it may have a negative impact on the market," said a dealer at a Japanese bank.
The key September 10-year JGB futures ended the morning session down 0.31 point at 139.40.
The fall in the futures market dragged down cash bond prices, pushing the yield on the benchmark 232nd 10-year JGBs up 0.04 percentage point to 1.345 percent.
MARKET AWAITS UPPER HOUSE ELECTION
Many dealers said they expected limited moves in the market before the Upper House election on July 29.
"Unless the blueprint of economic reforms becomes clear, which would be after the election, the market is likely to stay in a range," said a dealer at a Japanese bank.
For the near term, market players said there were fears of large stop-loss orders accelerating price falls. Some dealers also said the yield curve could steepen slightly in the 10-year zone before an auction scheduled next Tuesday.
Many dealers said the 10-year bond yield could reach 1.4 percent before the auction, but added they expect bargain-hunting bids to emerge at that level. ($1=124.85 Yen)