Japanese shares rose, outperforming weaker Asian markets, as the yen fell broadly following the Bank of Japan’s announcement to trim its huge bond purchases in the future. Tokyo’s Nikkei reversed its course to trade 0.7% higher, while the yen slumped to a 1-1/2-month low of 157.98 per dollar. The BOJ’s decision marked the start of a slow but steady retreat from its massive monetary stimulus.
Despite the BOJ’s commitment to continue buying government bonds at the current pace of roughly 6 trillion yen ($38 billion) per month, it pledged to detail its tapering plan for the next one to two years at a July meeting. The BOJ stated it would reduce the purchase amount thereafter to ensure long-term interest rates form more freely in financial markets.
Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management, noted growing expectations that the BOJ would reduce government bond purchases, effectively reversing quantitative easing. Although details are pending, the initial market reaction resulted in lower yields and a weaker yen.
The yen’s decline to a 34-year low of 160.245 per dollar at the end of April prompted several rounds of intervention by Japanese authorities, totalling 9.79 trillion yen ($62.25 billion). This year, the yen has declined over 10% against the dollar, influenced by U.S. Treasury yields. Greg Hirt, global CIO for multi-asset at AllianzGI, anticipates the BOJ to remain patient, possibly raising rates only in July or later as more data become available.
Across Asia, stocks wavered, with MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.16%, and Chinese blue-chip stocks off by 0.4%. Investors are also contemplating U.S. rate outlooks after the Federal Reserve tempered its rate-cut views, despite softer-than-expected inflation. The dollar hovered near a one-month high on the back of the hawkish Fed stance, while political uncertainty in Europe kept the euro under pressure.
Recent data showed a rise in Americans filing new claims for unemployment benefits, reaching a 10-month high, while producer prices unexpectedly fell in May. Following cooler-than-expected consumer inflation and the Fed’s revised dot plot, which lowered rate-cut expectations, traders are pricing in 50 basis points of cuts this year, with a September rate cut priced at 68%.
James McCann, deputy chief economist at abrdn, noted the Fed’s patient approach, anticipating a start to monetary easing in December. Amid volatile rate expectations, the U.S. dollar index, which measures its value against six peers, remained near a one-month high, up 0.3% for the week.
In commodities, oil prices eased but were on track for their first weekly gain in four weeks. Brent crude futures fell 0.62% to $82.26 a barrel, while West Texas Intermediate (WTI) U.S. crude futures eased 0.69% to $78.08, as markets assessed the impact of sustained U.S. rates against solid crude and fuel demand outlooks for the year.
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