MSCI’s broader stock index in the Asia-Pacific region outside Japan rose 0.8% to a new seven-month high and was heading for a third consecutive week of gains.
Japan’s Nikkei fell 0.4% and the yen, which jumped 2.7% against the dollar overnight, continued to climb and was up another about 0.2% to 128.65 to the dollar. It’s up 6% in just over three weeks since the Bank of Japan stunned markets by widening the range around its 10-year bond yield target.
A newspaper article signaling the possibility of more flexibility has doubled down on bets on an imminent change to the ultra-accommodative policy that seeks to keep yields close to zero.
The yield on Japanese 10-year government bonds passed its new high of 0.5% on Friday morning, at 0.53%. The BOJ made unscheduled bond purchases in response. [JP/]
“The market expects them to widen the 10-year range again at their next meeting,” said Naka Matsuzawa, head of Japan macro strategy at Nomura, referring to the upcoming central bank meeting, which will be held on Jan. 17 and 18.
“I think it’s too soon for the BOJ to give up,” he added. “He still has ammunition to defend the 0.5% yield limit.”
The BOJ described its December move as aimed at addressing distortions in the bond market and defended the new focus by buying bonds, but that is under enormous pressure now that traders are sensing a shift in the market.
“Any policy change this month would be a setback for the yen,” said Jane Foley, FX strategist at Rabobank. “However, we would be looking to buy the yen against the dollar on the downside, in anticipation of another (policy) change… in the spring.”
The BOJ is likely to lift its inflation forecast next week and discuss whether to take further action, sources familiar with the bank’s thinking told Reuters.
Beyond Japan, market sentiment was dominated by US inflation data for December, which more or less met consensus expectations. The annual rate of consumer price inflation fell to 6.5% in December, from 7.1% in November.
Investors reacted by lowering US interest rate expectations. A Federal Reserve hike of 25 basis points instead of 50 next month is now almost universally expected, and futures markets have been forecasting several rate cuts this year.
The dollar has generally slipped, US Treasuries have risen, and assets considered risky, such as stocks and cryptocurrencies, have risen.
The Nasdaq hit a one-month high. The US dollar fell 0.9% to a nine-month low of $1.0868 per euro and the risk-sensitive Australian dollar hit a five-month high of around $0.6984.
Bitcoin jumped 5% to surpass $19,000. But some analysts have sounded a cautionary note, as services inflation remains sticky and Fed policymakers talk only of slowing future hikes, not pivoting to cuts.
“The market’s relief rests on evidence of disinflation consolidating as the Fed nears the end of its tightening cycle,” said Vishnu Varathan, head of economics at Mizuho Bank Singapore.
“But the layers of inflation suggest that markets may be too optimistic about the ‘pivot.'”
Oil extended its gains overnight – also aided by optimism about China’s reopening – and Brent crude futures remained broadly flat at $83.82 in morning trading in Asia. [O/R]
South Korea’s central bank raised its key interest rate by 25 basis points on Friday, as expected, and economists now believe it may have reached the end of its hike cycle.