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The Independent Online
JAPANESE stocks may rise if an alliance between the ruling and opposition parties leads to further tax cuts to jump-start Japan's stalled economy. Bonds are likely to fall on concern the government will be forced to sell bonds to finance the move.

"The government could just suddenly bite the bullet and do something right," said Garry Evans, strategist at HSBC Securities. Ito-Yokado Co. and other retailers could gain if tax cuts are sufficient to tempt Japanese consumers to spend.

The benchmark Nikkei Index rose 3.5 per cent to a 10-week high of 14,779.94 last week. This week the market could climb to 15,000, said Junji Naiki, manager at Chiyoda Mutual Life Insurance.

The alliance between the ruling Liberal Democratic Party and the Liberal Party is fuelling optimism the government may carry out opposition demands to expand income tax cuts to 10 trillion yen and to freeze or reduce the 5 per cent national sales tax. "The alliance brings with it hope for more economic steps and greater political stability," said Naiki.

It may however have to be funded by bond issues which led to worries over a glut of bonds and depressed prices last week. The benchmark government bond yield rose 9 basis points to 0.900 per cent. "Supply concerns may continue to pressure bond prices,'' said Naomi Hasegawa, economist at Tokyo-Mitsubishi Securities. "However, we will have to see if the bond auction goes well."

The government plans to sell more than 10 trillion yen of bonds, out of some 12.5 trillion yen in new issues needed to finance its third supplementary budget for the year ending March. That's in addition to the 21 trillion yen in bonds previously announced. However, investors want to see the results of the next 10-year bond auction to get a better feel for demand. The auction will likely be on Wednesday. Some investors remain enthusiastic about government bonds since Japan's economic recovery may take more time.

Banks such as Sumitomo may gain if grisly earnings and bad loan write- offs compel them to line up for part of the government's 25 trillion yen set aside to replenish capital. "You can see the banks being given all this money, taking the write-offs, and reigning in their global ambitions and starting to lend again domestically -- at gunpoint," said Robert Howe, at Aimic Investment Management. Copyright: IOS and Bloomberg