Asian shares tentative, Japan yields close to policy cap ahead of BOJ meeting

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 government bond yields above the policy cap of 0.5 per cent in the past three sessions.

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

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

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

China's blue chips rose 0.2 per cent, while Hong Kong's Hang Seng Index was 0.2 per cent lower.

In a Reuters poll, 97 per cent of economists expected the BOJ to maintain its ultra-easy policy at the meeting, although 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 or 100 bps on either side of the 0 per cent policy rate.

"Should the BoJ abandon YCC, things will get messy," Sycamore said. "It would see the JPY explode higher along with JGB 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 basis points either side of 0 per cent. 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 per cent to 128.96 per dollar on Wednesday but was still not too far from Monday's seven-month high of 127.21 per dollar.

The US dollar index hovered at 102.5, just a touch above its seven-month low of 101.77 hit on Monday. It has been undermined by falling US bond yields as markets wager the Federal Reserve can be less aggressive in hiking rates.

Longer-dated Treasury yields edged higher for the third straight session. The yield on benchmark 10-year Treasury notes rose slightly to 3.5402 per cent from its US close of 3.535 per cent, partly in anticipation of the BOJ tweaking its policy.

The two-year yield, which rises with traders' expectations of higher Fed fund rates, touched 4.2005 per cent, compared with a US close of 4.192 per cent.

In the oil market, prices jumped on hopes of Chinese demand rebounding. Brent crude futures rose 0.7 per cent to $86.5 while US West Texas Intermediate (WTI) crude settled up 0.8 per cent, at $80.83.

At the World Economic Forum in Davos on Tuesday, German Chancellor Olaf Scholz said he was convinced Europe's largest economy would not fall into a recession.

China's Vice Premier Liu He also welcomed foreign investment and declared his country open to the world after three years of pandemic isolation.

Data on Tuesday showed China's economic growth had slumped in 2022 to the weakest rate in nearly half a century.

Spot gold was largely unchanged at $1908.49 per ounce.