(Recasts, updates prices, adds comments)
By Kevin Plumberg
HONG KONG, May 23 (Reuters) - Japanese government bond
prices dropped on Friday, pushing yields to their highest in
nine months, after fears of rising inflation pummelled U.S.
Treasuries despite a slight dip in oil prices from record
highs.
Stocks in Japan rose modestly, boosted by demand for
sectors that perform well during periods of economic
sluggishness but were down 1 percent on the week.
Elsewhere in the Asia-Pacifc region <.MIAPJ0000PUS>, shares
declined for a fourth day running, shedding 0.5 percent.
Oil prices slipped below $135 a barrel on Thursday but were
up 3.8 percent on the week, stoking fears that energy costs
could cut consumer demand and choke business investment.
Worries that inflation pressures around the world will
continue to build and increase the potential for tighter
monetary policy hurt government bonds.
"Finally, after 10-15 years, the inflation threat is here.
This is something we haven't experienced in quite some time.
It's an X factor. So people are very cautious about fixed
income overall," said Naruki Nakamura, a portfolio manager who
oversees about 400 billion yen in Japanese government debt at
Fischer Francis Trees & Watts.
Growing expectations that the U.S. Federal Reserve may have
to raise interest rates to fight price pressures clobbered U.S.
Treasuries, helping to propel the benchmark 10-year Japanese
government bond yield <JP10YTN=JBTC> to the highest since
August 2007.
The benchmark 10-year Japanese government bond yield, which
moves inversely to price, climbed 8 basis points to 1.74
percent after jumping as much as 10 basis points at one stage.
U.S. 10-year Treasury yields <US10YT=RR> added to
Wednesday's 11 basis point pop, rising to 3.94 percent, the
highest of the year.
VOLATILE BONDS
The bond market has been volatile as investors who had bet
on higher prices during the brunt of the credit crisis unwind
those positions. Also, despite the slight fall in oil prices,
central banks around the world have made clear that inflation
is their main focus, making higher interest rates likely.
"An increase in risk-seeking coupled with rising inflation
and inflation expectations represents a perfect storm for
nominal bonds, whether or not they have the stamp of the U.S.
Treasury. They are one asset you definitely dont want to hold
in such an environment," analysts with State Street Global
Markets said in a research note.
U.S. light crude prices <CLc1> settled on Thursday at
$130.60 a barrel, well off a record high of $135.09. However,
many analysts believe it is inevitable that oil prices will
continue to climb because of the large amount of speculation
and insatiable demand from developing economies, such as China.
"Oil would not be at $130 a barrel without China's roaring
economy and voracious appetite for energy of all types,
including oil. If China keeps growing, as we expect, upward
pressure on oil prices will persist," said Donald Straszheim,
vice chairman and economist with Roth Capital Partners in Los
Angeles.
Energy and resource stocks weighed in Australia <> as
oil and commodity prices dipped, sending the index down 1
percent.
Hong Kong's Hang Seng index <> dipped 0.5 percent and
Taiwan's TAIEX index <> was down 0.8 percent.
The drugs sector provided the biggest lift to Japan's
Nikkei share average <>, which rose 1.1 percent after
Roche Holding AG <ROG.VX> said it would increase its stake in
Chugai Pharmaceutical Co Ltd <4519.T>.
The U.S. dollar steadied as oil prices eased, but the
currency stayed in sight of a one-month low against the euro on
worries that inflation could lead to a deeper U.S. slowdown.
The dollar rose on Thursday, boosted by a surprise drop in U.S.
weekly initial jobless claims.
The euro was unchanged at $1.5730 <EUR=>, while the dollar
was flat at 104.11 yen <JPY=>.
Spot gold <XAU=> was down 0.3 percent at around $918 an
ounce.
(Additional reporting by Eric Burroughs and Elaine Lies in
Tokyo; Editing by Lincoln Feast)
