Japanese bonds rebound after sharp selloff, yen rally as election looms

By Rocky Swift

TOKYO, Jan 15 (Reuters) - Japanese government bonds (JGBs) rallied on Thursday as the yen rebounded, recovering after a sharp selloff on expectations of a snap election.

The benchmark 10-year JGB yield JP10YTN=JBTC fell 2.5 basis points (bps) to 2.155%, retreating from 2.185%, its highest level since February 1999, reached on Wednesday. Yields move inversely to bond prices.

The yen recovered from a 1-1/2-year low against the dollar after fresh warnings from Finance Minister Satsuki Katayama against "excessive" moves and a U.S. Treasury statement calling for "sound" policy from the Bank of Japan to contend with currency volatility.

JGB yields surged this week as reports filtered out about a potential snap election, raising prospects that it could hand Prime Minister Sanae Takaichi a mandate to pursue more stimulus.

A ruling Liberal Democratic Party (LDP) official on Wednesday confirmed that Takaichi plans to dissolve parliament next week, with a vote potentially taking place on February 8.

"Although yields have recently increased, they probably do not still accurately represent Japan's fiscal situation," Mahjabeen Zaman, the head of foreign exchange research at ANZ, said on a podcast. "And as a result, the high fiscal debt that Japan carries has weighed on the yen instead."

"If the lower house elections take place and the LDP does gain more seats, a more aggressive fiscal strategy is likely to follow, and that will see a further rise in yields," she added.

The 20-year JGB yield JP20YTN=JBTC fell 2 bps to 3.14%. The 30-year yield JP30YTN=JBTC dipped 1 bp to 3.5%.

The two-year yield JP2YTN=JBTC fell 1 bp to 1.165%, while the five-year yield JP5YTN=JBTC fell 2.5 bps to 1.615%, down from a record high in the previous session.