TOKYO MARKET

WHEN retired school teacher Tetsuzo Nara opened a savings account at his local post office almost 10 years ago, he stood to make 6 per cent a year. Now, with returns not even one-sixth of that, he's looking elsewhere.

Nara, and those like him, may be about to knock the wind out of a three- month rebound in Japan's Y285,000bn government bond market. About Y100,000 in postal time deposits, money tapped by the Finance Ministry to fund state projects and buy bonds, mature in 2001. If enough people like Nara take money out, the Ministry may have to sell bonds to raise money, dragging down prices and pushing up yields.

This is "a potential time bomb for the bond market", said Akitsugu Bando, a fund manager at Okasan Capital Management.

Cracks started appearing in Japan's public financing monolith last year. In November, the Finance Ministry said it would sell 23 per cent more bonds this year and stop outright bond purchases in the secondary market. Only after the yield on 10-year bonds rose to a 21-month high of 2.505 per cent on 3 February did the ministry return to the secondary market.

With a combination of buying bonds and driving overnight lending rates down to zero, the government brought yields down to 1.405 per cent. However, it's not clear how long it can keep up those purchases amid calls for fresh spending to revive the economy, which shrank an estimated 2.2 per cent last year. A flood of cash from its postal savings pool would exaggerate the government's funding shortfall.

"The fate of this pool of savings is of crucial importance for the Japanese economy and the behaviour of financial assets in the global market place," said Tim Bond, strategist at Barclays Capital. "Yields on all Japanese financial assets will rise sharply in 2000-2001."

A sharp rise in yields could delay economic recovery since the yield is a reference to set rates on everything from corporate bonds to mortgages.

The link between the postal savings and bond markets is the Finance Ministry's Trust Fund Bureau. For almost 15 years the bureau's postal savings holdings allowed it to control the level of interest rates by holding 30 to 40 per cent of the total outstanding amount of government bonds.

Analysts are sceptical of the Post Office's ability to retain the deposits. Since Japan let banks and insurers join brokerages in selling mutual funds on 1 December, post office deposit holders have been targeted by aggressive marketing of investment funds promising far higher returns.