"Investors are reshuffling portfolios to increase interest in companies with little risk of further drops in profit," said Ryuichi Endo, fund manager at Japan Investment Trust Management.
Bonds are likely to rise because investors are confident that economic proposals drafted by the ruling party will not lead to more government spending.
"The proposals won't have any impact on the economy and the market," said Hideo Sakaguchi, investment manager at Meiji Mutual Life Insurance, which has boosted its yen bond-holdings for the year to March.
Last week, the benchmark government bond rose, pushing the yield down 6.5 basis points to 1.645 per cent. The benchmark Nikkei 225 index fell 34.77, or 0.21 per cent, to 16,756.24. The index will probably fluctuate between 16,500 and 17,000 as investors wait to see if the government takes further steps to revive the economy after this weekend's meeting in London of the Group of Seven industrialised countries.
On Friday, the Liberal Democratic Party launched the fourth economic package in five monthswhich included no new taxes or spending, only measures to make it easier for companies to buy back their own shares and a proposal to allow companies to count unrealised profits from real estate as capital.
Without a tax cut or public works spending, effects on the economy and the market are limited, said Mr Sakaguchi. Akio Makabe, general manager at Dai-Ichi Kangyo Research Institute, added: "The plan is too vague for us to judge the effect on the economy." Investors are already focusing on a supplementary budget later this spring, he said.
Some investors are concerned the G-7 meeting will put pressure on Japan to take stronger action to boost its economy and help its Asian neighbours. Kazuo Kojima of Fuji Bank, said that if the government launches more measures, such as tax cuts or public works spending, worth Y7trillion to Y10trillion, that could push down bond futures.
But others expect Japan to resist pressure and focus on passing the budget for the year starting 1 April. "Other countries will put pressure on Japan, but they can't do anything right away - the bond market is pricing that in and will remain firm," said Kenji Saito, at Sakura Investment Management.
Copyright: IOS & Bloomberg