Japanese government bond prices dropped on Friday, pushing yields to their highest in nine months, after fears of rising inflation pummeled USTreasuries 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, 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 US Federal Reserve may have to raise interest rates to fight price pressures clobbered US Treasuries, helping to propel the benchmark 10-year Japanese government bond yield 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. US 10-year Treasury yields added to Wednesday's 11 basis point pop, rising to 3.94 percent, the highest of the year. 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 US Treasury." "They are one asset you definitely don't want to hold in such an environment,” analysts with State Street Global Markets said in a research note. US light crude prices 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 said it would increase its stake in Chugai Pharmaceutical Co Ltd. The US 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 US slowdown. The dollar rose on Thursday, boosted by a surprise drop in US weekly initial jobless claims. The euro was unchanged at $1.5730 while the dollar was flat at 104.11 yen spot gold was down 0.3 percent at around $918 an ounce.
