July 12 (Bloomberg) -- Japan’s 10-year yields were near the highest level in two weeks after the party of Prime Minister Naoto Kan lost control of the parliament’s upper house, undermining his efforts to cut the nation’s dependency on debt.

Benchmark bonds maintained last week’s losses as the election made it less likely Kan’s Democratic Party of Japan will be able to raise the sales tax to bolster the nation’s finances. The Bank of Japan will hold a two-day policy meeting this week at which economists say it will keep interest rates near zero to spur growth.

“As optimism fades about the fiscal rehabilitation strategy, yields should rise,” said Osamu Koizumi, who helps manage the equivalent of $7.6 billion as chief investment officer at Yasuda Asset Management Co. in Tokyo. “Yields at around 1.10 percent are a tough sell for investors.”

The yield on the benchmark 10-year bond was little changed at 1.145 percent at the 11:05 a.m. morning close in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.1 percent security due June 2020 gained 0.044 yen to 99.598 yen. The yield rose to 1.165 percent on July 8, the highest since June 23.


 Ten-year bond futures for September delivery gained 0.12 to 141.33 on the Tokyo Stock Exchange.

The DPJ won 44 upper house seats in yesterday’s election, compared with 51 for the Liberal Democratic Party, according to results compiled by public broadcaster NHK. Half of the 242 seats in the less powerful of Japan’s two houses of parliament were being contested.

Sales Tax

Kan, who took office a month ago, called for a debate on whether to raise the 5 percent sales tax to lower the nation debt. Losing the coalition government’s majority will mean he has to reach out to smaller groups to ensure passage of legislation to bolster growth.

“The results were far from what we sought,” the prime minister said at press conference in Tokyo today. “One major reason was that my remarks on the consumption tax left an abrupt impression to the public and my explanation was insufficient.”

“The DPJ will have to be a little more serious about arresting deflation and boosting economic growth, increasing pressure on the BOJ” to do more easing, said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “That’s a positive factor for bonds.”By Masaki Kondo and Yoshiaki Nohara

--Editors: Nicholas Reynolds, Rocky Swift

To contact the reporters on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.