LONDON, May 9: Japanese government bonds (JGBs) are not likely to find much support from the recent yen strength as concerns about the possibility of higher interest rates loom, analysts said on Friday.

"The concern is that the authorities will attempt to push up the currency by increasing interest rates and there will be a negative spill over into the JGB market," said Julian Fisher, economist at Daiwa Europe in London.Fisher said for now the yen was strengthening on rhetoric, but if that ceased to be effective, there were two alternatives.

"Either intervention early in the currency markets, which is not always so trustworthy, or an increase in interest rates," he said, adding that that too had its disadvantages. "It is unlikely that the Japanese authorities will change monetary policy at an early stage, given the economy is still struggling to make real progress and that in the banking sector it is not clear as yet that there is a full recovery of confidence," said Fisher.

He said if the perception persisted that short term interest rates was the chosen method, then it would inevitably have a negative impact on JGBs.Earlier in the week, senior ministry of finance official Eisuke Sakakibara said looking at currency fluctuations over the past year, it was possible the yen could strengthen to 103 yen to the dollar. At 1213 GMT, the yen was trading at 121.94/98 yen to the dollar. Friday's trading is the first time the currency has been below 123.00 yen to the dollar since April 4.

Juli Collins-Thompson, economist at Yamaichi International in London, said the sharp rise in the yen had hit the equity market with concerns for exporters.

"Normally what you would expect is when equities go down you see some support for JGBs, but today JGBs are being influenced by other factors," she said. "Specifically there is a lot of concern about the real strength of the economy and what that means for interest rates."

She said the market had suffered on speculation that official interest rates could go up as soon as July, after publication of the Tankan report. The second quarter Tankan report is expected during the week from July 8.Dick Howard, senior economist at Julius Baer Investments in London, said reasons for the further decline in JGBs on Friday were not as obvious as were the reasons for Thursday's fall.

"It is may be just straws in the wind, the economy may not be as weak and inflation pressures not as dormant as people thought and so the market is reassessing," he said. "At the same time the equity market is looking a little firmer as a result of pension funds allocations going to equities rather than bonds."

For value analysts recommended the 10-year sector.

"We are targeting 2.75 percent on the 10-year on a three-month view if it becomes evident that the consumption tax hike is having short lived effects and there are concerns about when interest rates will actually go up,' Collins-Thompson said.

Fisher said there would be a natural demand for 10-year yields at current levels. The key JGB 182 benchmark bond is yielding 2.580 percent.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.