Asian shares mixed as markets await BOJ meeting outcome on interest rates

Sydney — Asian shares were mixed on Wednesday while Japanese yields hugged a policy cap, with markets anxiously awaiting a pivotal Bank of Japan (BOJ) meeting that could see the world’s third-largest economy shift away from decades of ultra-low interest rates.

The BOJ’s official two-day meeting will end on Wednesday and speculation is rife it will make further changes to its yield curve control (YCC) policy, given that the market pushed 10-year Japanese government bond (JGB) yields above the policy cap of 0.5% in the past three sessions.

In early Wednesday trade, however, the 10-year yield fell to 0.485% before returning to 0.5%. Japan’s Nikkei share index meanwhile gained 0.6%.

MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.2%, after weak earnings from Goldman Sachs overnight dragged the Dow 1% lower. The investment bank reported a bigger-than-expected 69% drop in fourth-quarter profit.

S&P 500 futures and Nasdaq futures both dipped 0.2% on Wednesday. Overnight, the S&P 500 was 0.2% lower and the Nasdaq Composite rose 0.14%.

China’s blue chips rose 0.2%, while Hong Kong’s Hang Seng index was 0.2% lower.

‘Things will get messy’

In a Reuters poll, 97% of economists expected the BOJ to maintain its ultra-easy policy at the meeting, though the markets have positioned for chances of adjustments.

Tony Sycamore, analyst at IG Group, said foreign exchange and share markets had most likely priced in the possibility of a further tweak from the BOJ to allow yields to move 75 basis points (bps) or 100 bps on either side of the 0% policy rate.

“Should the BOJ abandon YCC, things will get messy,” Sycamore said. “It would see the [Japanese yen] explode higher along with [Japanese government bond] yields. Global yields would also increase due to a possible acceleration of Japanese investors’ unhedged foreign bond portfolios.

“Overall, the Nikkei would be poleaxed, and global equity markets would also weaken.”

Just a month ago, the BOJ shocked markets by doubling the allowable band for the 10-year JGB yield to 50 bps either side of 0%. The change emboldened speculators to test the BOJ’s resolve.

Mizuho Bank said the BOJ adjusting YCC or pushing interest rates above zero was just a matter of time and execution, given the pressures arising from its divergence from monetary policy elsewhere.

A survey of global fund managers by BofA Securities out on Tuesday showed that expectations of further appreciation in the Japanese yen in January were the highest in 16 years.

In the currency market, the yen eased 0.6% to 128.96 per dollar on Wednesday, but was still not too far from Monday’s seven-month high of 127.21 per dollar.