Japan’s bonds rose for a second day on speculation damage from the nation’s strongest earthquake will impair the economic recovery and spur demand for the refuge of government debt.

Yields on benchmark five-year notes plunged the most in more than a year as Bank of Japan policy makers meet Monday and the central bank said it will pump a record 7 trillion yen ($86 billion) into the financial system. The nation’s currency reached a four-month high amid prospects Japanese investors are repatriating assets, raising concern a stronger yen will hurt exporters’ earnings.

“When an economic crisis breaks out, the Bank of Japan is usually the first one to take action, so we can assume the BOJ’s monetary easing along with flight to quality will spur purchases of bonds,” said Tadashi Matsukawa, fixed-income head at PineBridge Investments Japan Co. in Tokyo, which manages the equivalent of $2.1 billion in bonds. “I expect bonds with maturities of five to seven years to be bought.”

The benchmark five-year yield dropped 7.5 basis points to 0.49 percent as of 9:52 a.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 0.6 percent security due March 2016 added 0.366 yen to 100.536 yen. The decline in the yield was the biggest since December 2009.

Ten-year bond futures for June delivery gained 0.49 to 139.69 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average lost 4.2 percent.

Friday's magnitude-8.9 earthquake triggered a tsunami that swept as far as 20 kilometers (12.4 miles) inland along the northern coast, risking meltdowns at two nuclear power reactors. Chief Cabinet Secretary Yukio Edano said the government would use 200 billion yen of money left over from the budget for the fiscal year ending March 31 to start an extra spending package.

Bank of Japan Governor Masaaki Shirakawa told reporters late Sunday he is ready to unleash “massive” liquidity into the banking system as the central bank seeks to ensure financial stability. The 7 trillion yen emergency measure represents the bank’s first same-day repurchase operations since May. Monday’s decision on policy was originally scheduled for Tuesday. The central bank said it shortened the meeting to accelerate its response.

The damage caused by the earthquake is estimated at 15 trillion yen, Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former BOJ official, wrote in a report Monday. The government may spend about 2 trillion yen for reconstruction, he wrote.

Kobe Quake

Liquidity from the central bank may fail to prevent yields from rising as pressure mounts on insurance companies and Prime Minister Naoto Kan’s administration to sell bonds to pay for reconstruction.

“Rebuilding after the Kobe quake was a significant strain on the budget, and the cleanup and rebuilding cost is likely to be even higher this time,” Chris Low, chief economist at FTN Financial in New York, wrote in a research note on Friday. Yields on 10-year debt “are likely to increase as much as 50 basis points or more over the next year,” he wrote.

In the five trading days after a 6.9-magnitude earthquake struck Kobe, western Japan, in January 1995 killing more than 6,000 people, yields rose 8 basis points, or 0.08 percentage point, to 4.73 percent.

The yen strengthened as much as 80.62 per dollar today, a level not seen since November. A stronger yen reduces the value of overseas earnings at Japanese companies when repatriated.