Yen flying as market challenges BOJ, stocks cheer inflation’s retreat

  • Rate expectations were lowered following a slowdown in US inflation
  • Asian stocks rise in 7 months
  • JGB yield breaks BOJ ceiling as bets on policy shift build

SINGAPORE/TOKYO, Jan 13 (Reuters) – Asian stocks rose on Friday as investors cheered a slowdown in U.S. inflation, while the yen hit a seven-month high and Japanese bond yields broke above. of the central bank’s target as markets challenged Tokyo’s commitment to unwind. monetary policy.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) rose 0.8% to hit a new seven-month high and headed for a third straight week of gains. victory.

Japan’s Nikkei (.N225) fell 0.4% and the yen, which had risen 2.7% against the dollar overnight, held on and rose another 0.2% to 128.65 per dollar. It has risen 6% in just three weeks since the Bank of Japan shocked markets by widening the band around the 10-year bond yield target.

A newspaper report flagging the possibility of more flexibility doubled bets on a future shift away from ultra-easy policy that seeks to pin yields close to zero.

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The yield on 10-year Japanese government bonds breached a new cap of 0.5% in Friday morning trade at 0.53%. The BOJ conducted unscheduled bond purchases in response.

“The market expects at the next meeting that they will increase the band for 10 years again,” said Naka Matsuzawa, Japan’s chief macro strategist at Nomura, referring to the central bank’s upcoming meeting that runs on January 17-18.

“I think it’s too early for the BOJ to stop,” he added. “It still has bullets to protect the 0.5% yield cap.”

The BOJ described its move in December as aimed at addressing distortions in the bond market, and defended the new target for bond purchases – but is under intense pressure today as traders have a sniff at the transfer meeting next week.

“No policy change this month is a setback for the yen,” said Rabobank FX strategist Jane Foley. “However, we will look to buy the yen against the dollar on the downside in anticipation of another (policy) move … in the spring.”

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The BOJ is likely to raise inflation forecasts next week and debate whether further measures are needed, sources familiar with the bank’s thinking told Reuters.


Beyond Japan, market sentiment was dominated by overnight US December inflation data that came in more or less below consensus expectations. The annual pace of headline consumer price inflation slowed to 6.5% in December from 7.1% in November.

Investors responded by reducing expectations for US interest rates. A Federal Reserve hike of 25 basis points rather than 50 next month is now close to all expectations, and futures markets are pricing in more rate cuts this year.

The dollar fell sharply, US treasuries rallied and assets seen as risky, such as stocks and cryptocurrencies, rose.

The Nasdaq (.IXIC) 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 rose to a near five-month high of $0.6984.

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Bitcoin surged 5% to break above $19,000. But some analysts have taken a note of caution because inflation services remain sticky and because Fed policymakers are only talking about a slowdown in the initial increases, not a pivot to cuts.

“The market’s relief is based on strong evidence of dis-inflation squaring by the Fed nearing the end of its tightening cycle,” said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.

“But the layers of inflation suggest that markets may be overly optimistic about the ‘pivot’.”

Oil extended overnight gains – helped, too, by optimism about China’s reopening – and Brent crude futures were broadly steady at $83.82 in Asian morning trade.

South Korea’s central bank raised its policy interest rate by 25 basis points on Friday, as expected, and economists now think it may have reached the end of its hiking cycle.

Editing by Lincoln Feast.

Our Standards: The Thomson Reuters Trust Principles.


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