Asian shares cautious, BOJ faces critical policy decision

There were also rumors that the BOJ could hold an emergency meeting on Monday as it struggles to defend its new yield limit in the face of massive selling.

This put the market in a worried mood and Japan’s Nikkei slipped 0.9% in early trade.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2%, tracking gains of 4.2% last week on hopes of a faster Chinese reopening.

S&P 500 futures and Nasdaq futures both declined 0.1% after a surge on Wall Street last week.

Earnings season gathered steam this week, with Goldman Sachs, Morgan Stanley and the first big tech name Netflix among the reporting.

World leaders, policy makers and top corporate heads will attend the World Economic Forum in Davos and a number of central bankers will speak, including nine members of the US Federal Reserve.

The BOJ’s official two-day meeting ends on Wednesday and speculation is rife that it will have to tweak its yield curve control (YCC) policy after the market pushed the 10-year yield above the new threshold of 0.5%.

The BOJ bought bonds worth nearly 5 trillion yen ($39.12 billion) on Friday in its biggest daily operation on record, yet the yield ended the session at 0.51%.

However, it tried to get ahead of speculative sellers, announcing it would conduct another emergency round today, suggesting it is determined to defend its yield policy, at least for now.

“There is still some potential that market pressure will force the BOJ to further adjust or exit the YCC,” analysts at JP Morgan said in a note. “We cannot ignore this possibility, but at this stage we do not consider it to be the main scenario.”

“While domestic demand has begun to recover and inflation continues to rise, the economy is not heating up to the point that it can tolerate the potential risk of a sharp rise in interest rates and a large yen appreciation,” he said. ” “Thus, we find that the economic environment does not strongly support continued policy changes.”

yen un-anchor

The BOJ’s ultra-easy policy has acted as an anchor of sorts for yields globally, pulling the yen down. Were it to abandon the policy, it would put upward pressure on yields in developed markets and is likely to see the yen bounce.

The dollar is already at 128.03 yen, its lowest since May, having dropped 3.2% last week, and threatens to break key support around 126.37.

The euro also declined 1.5% on the yen last week, but was largely aided by gains on a softer dollar, which stood at $1.0826 on Monday and was off a nine-month peak.

Falling US bond yields weakened the dollar as markets bet the Federal Reserve could be less aggressive on hiking rates as inflation clearly turned around.

Futures now offer almost no chance that the Fed will raise rates by a half-point in February, with a quarter-point move seen as 94% likely.

The yield on the 10-year Treasury is as low as 3.51%, having declined 6 basis points last week to near its December trough and key chart target of 3.402%.

Alan Raskin, global head of G10 FX strategy at Deutsche Securities, said the loosening of global supply constraints in recent months is proving to be a disinflationary shock that raises the prospect of a soft landing for the US economy.

“Low inflation itself encourages soft-landing through real wage gains, prompting the Fed to pause more easily and a better-behaved bond market with favorable spillovers to financial conditions,” Raskin said.

“A soft landing also reduces the tail risk of very high US rates, and this low risk premium helps global risk appetite.”

Gold has benefited from falling yields and the dollar, having jumped 2.9% last week to its highest since April and was last trading at $1,918 an ounce. [GOL/]

Oil prices also rallied last week on hopes that China’s rapid reopening would boost demand. Data on mobility, traffic and transport trips in China showed a sharp revival in movement ahead of the Lunar New Year holidays next week.

Chinese data on economic growth, retail sales and industrial production due this week is certainly disappointing, but markets will look to the past for a swift recovery now that coronavirus restrictions have been lifted.

Early on Monday, Brent was up 8 cents at $85.36 a barrel, while US crude gained 10 cents to $79.96.

The text of this story is published from a wire agency feed without any modification.