The recent buying spree of Japanese government bonds that has pushed the key long-term interest rate to a record low will continue for at least several months, as an end to the deflationary trend is nowhere in sight, economists and analysts say.

With Japanese share prices and real estate values in a free-fall and worries over a possible U.S.-led war against Iraq stoking fear of dollar-denominated assets, financial institutions have been flocking to JGBs in their search for investments with a positive rate of return.

But that rush has already reduced the rate of return to less than 1 percent — and driven up prices at the same time.

The yield on the benchmark 10-year government bond edged up Friday after hitting a record low of 0.75 percent the previous day. The uptick was prompted by Chief Cabinet Secretary Yasuo Fukuda’s warning against a rapid fall in the interest rate.

At any rate, the bond boom is likely to temporarily ease come spring as Japanese banks — major buyers of government bonds — are expected to sell their holdings to reap profits from higher prices.

Hideo Kumano, senior economist at Dai-Ichi Life Research Institute Inc., expects the rate to fall to 0.7 percent before banks move to profit-taking ahead of the March 31 book-closing.

Kumano said any worries over the glut of government bonds have so far been eased by the Bank of Japan’s bond-buying operations, worth up to 1.2 trillion yen every month, as part of its monetary easing policy.

Kumano also said that while the price boom in JGBs is providing weak banks with an opportunity to turn over their holdings and take profits, the bond market is not providing them with a fundamental solution to their mountains of bad loans.

Besides the approaching March 31 end of the fiscal year, pressure on banks to pad their bottom lines will come from special bank audits by the Financial Services Agency, results of which are due out in the middle of May, Kumano said.

Yasunari Ueno, chief market economist at Mizuho Securities Co., said, however, that the yield will begin to edge back down, to as low as 0.6 percent, after the April 1 start of fiscal 2003.

Ueno sees no negative factors on the horizon in the Japanese government bond market. Even if investors unload their holdings to cement profits, they will eventually return to JGBs as the sluggish economy makes other financial products less attractive, he said.

The lack of lucrative investments is expected to also drive individual investors to buy government bonds. Regardless of the interest rate level, Ueno said, people are on the lookout for anything that will help them safeguard their nest eggs.

Finance Minister Masajuro Shiokawa said he believes people are hoarding their money at home, and that those who are will rush to buy new bonds targeting individuals that go on sale Monday.

He also said he wants private financial institutions to launch various new products to attract individual investors.

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