Bonds fell for the last three days after Finance Minister Hiroshi Mitsuzuka, who has voiced reluctance to use public funds to prop up the economy, hinted at further measures to stimulate activity.
"It looks like the government is changing its policy and will spend money on the economy, rather than cut the deficit," said Akitsugu Bando, manager at Okasan Capital Management. "Given that, we won't rush to snap up bonds for awhile."
The economy's weakness has prompted the Bank of Japan to keep interest rates at record lows, helping bonds.
In the week just ended, the yield on the benchmark government bond, maturing in September 2005, rose 4.5 basis points to 1.645 per cent.
The ruling Liberal Democratic Party is considering another package to stimulate the economy, which would be unveiled in March. This indicates that the government is moving into line with the many investors who consider the economy needs a boost, according to Kenji Shimada, manager in bonds at Kokusai Securities. "The bond market can't ignore that," he said.
Japanese stocks are likely to see gains in banks offset by losses in top exporters such as Sony and Honda.
"When the market is down, you hear nothing but complaints that the government isn't doing enough or whatever," said Shuichi Natori, a manager at Nomura Securities. "But when stocks recover, investors not only give credit to the government's policies but they expect that more is in the pipeline."
The Nikkei benchmark index surged 924.47 points, or 6.11 per cent, to 16,046.45 last week.
Koji Omi, the director-general of the Economic Planning Agency, said on Friday that the government would consider speeding up public works projects if necessary to stimulate the economy, but some investors remained sceptical that it would move quickly.
"It sounds like they have a good plan but the roles of party officials and policy makers are all mixed up," said Jun Fukashiro, a fund manager at NCB Investment Management. He said the question was whether they really had something effective to offer.
In another market-boosting measure, the LDP proposed that banks be allowed to re-evaluate their property assets at current value rather than purchase price.
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