Western Asset: 10-year JGB yield may slide

Western Asset Management head Naoya Orime speaks during the Reuters Japan Investment Summit in Tokyo June 28, 2010.

TOKYO (Reuters) - Japan's benchmark 10-year bond yield could sink below 1 percent toward record lows if the country doubled its sales tax to help rein in massive public debt, the head of Western Asset Management's Japan unit said on Monday.

New Prime Minister Naoto Kan has pitched a doubling of the sales tax to 10 percent as a key step needed for fiscal reform.

While a sales tax hike could push up the consumer price index in the short run, the move could intensify deflation concerns, depressing the economy and triggering heavy JGB purchases, Naoya Orime told the Reuters Japan Investment Summit.

"The level of the 10-year JGB yield could quickly fall to around 0.75-0.8 percent if the sales tax was raised to 10 percent," Orime said.

The 10-year yield declined to a seven-year low of 1.125 percent last week on the view that Kan is more serious about fiscal reform than many of his predecessors. It was 1.150 percent on Monday.

It has not fallen below 1 percent since 2003, when it briefly fell to a record low of 0.43 percent, hurt by plunging share prices and a surging yen.

California-based Western Asset Management Company, one of the world's leading bond managers, holds $478.6 billion in assets. Its assets under management in Japan were $46.3 billion.

On investments, Western Asset recommends corporate bonds, emerging market bonds and asset-backed securities for Japanese investors who are interested in diversifying and seeking higher returns.

"Uncertainty remains in the U.S. housing market, but asset-backed securities are very cheap. There is a good chance of getting higher returns by investing in them for the medium to long term," said Orime, who joined Western Asset Management in April 2007 after spending 15 years at Blackrock Japan.

He said Western Asset, a unit of Legg Mason (LM.N), is planning to increase its sales staff in Japan, hoping to attract more business from pension funds, as well as to strengthen its investment trust fund business.

Western Asset believes it has an advantage in wooing pension funds as they have been shifting into bonds at the expense of risk assets, such as stocks, ahead of changes in accounting standards.

Western Asset also sees the Japanese investment trust or toushin market as an important area where it can generate good revenue.

"We are looking to expand our Japanese operations ... our business in the investment trust fund market is growing very well," Orime said.

Currently, Western Asset has 32 staff members in Japan, including 11 fund managers.

Orime said he hoped to fill the company's Tokyo office, which can hold up to nearly 50 people, in about three years.

(Editing by Edwina Gibbs)