Asian stocks are off five-month highs and the yen has extended a sharp rally with speculation the Bank of Japan could take another small step toward dismantling its super-easy stimulus policies.
The BOJ sets policy later in the session. The Nikkei newspaper reported, without citing sources, that policymakers will discuss tweaking the yield control policy to allow 10-year government bond yields above a 0.5 per cent cap in some circumstances.
The yield leapt to 0.505 per cent in early trade on Friday.
The yen had earlier jumped about 0.5 per cent on the report, gaining even as the dollar rose elsewhere after strong US economic data and a toned down outlook from the European Central Bank.
The yen was holding about 0.5 per cent higher at 138.83 per dollar in early trade, helped by Tokyo consumer prices rising slightly more than expected and as the risk of a policy surprise spooked short sellers.
“I wouldn’t be running short into the BOJ,” said Westpac strategist Imre Speizer.
“I think the idea is even a tiny tweak is a big deal for the BOJ. We’ll probably get a reaction either way.”
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4 per cent. Japan’s Nikkei opened 1.4 per cent lower though bank shares surged to an eight-year high on the prospect of rising interest income at lenders.
“If the BOJ adjusts its yield curve control program, financial markets will likely take it as the start of a policy tightening cycle regardless of the BOJ’s rationale,” said Commonwealth Bank of Australia strategist Kristina Clifton.
“Under such scenario, we consider dollar/yen … can lose about two to four yen on the day.”
A tweak would also cap what may prove a landmark week for central banks, with markets pricing a better-than-even chance that the Federal Reserve and ECB have made their final hikes of the cycle.
On Thursday, the ECB raised rates by 25 basis points to a 23-year high, as expected, but President Christine Lagarde sent the euro tumbling with talk of a pause in September.
“Do we have more ground to cover? At this point in time I wouldn’t say so,” Lagarde told reporters. The euro slid nearly 1 per cent overnight and nursed losses at $1.0980 on Friday.
On Wednesday, the Fed had also hiked by 25 bps and Chair Jerome Powell cheered investors when he said the central bank’s staff no longer forecast a recession.
Further strong US data, with better-than-expected second-quarter growth figures out overnight drove up longer-end Treasury yields and the US dollar.
Ten-year yields rose 16 basis points and broke above 4 per cent. They were steady at 4.006 per cent in Asia trade.
S&P 500 futures tacked on 0.1 per cent and Nasdaq 100 futures added 0.2 per cent, helped by an after-market jump in shares of Intel which reported a surprise quarterly profit.
Brent crude oil futures slipped slightly from three-month highs to $83.63 a barrel.
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