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Japan bonds drop before BOJ, Asian stocks decline: markets wrap

Japan bonds drop before BOJ, Asian stocks decline: markets wrap
Morning commuters in front of the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Monday, 16 January 2023.

Japan’s 10-year bond yield climbed to a new decade-high following a report that the central bank will discuss tweaking its yield-curve control at a policy meeting ending on Tuesday. Most Asian stocks fell after China manufacturing contracted.

The yield on Japan’s 10-year bond rose to 0.955%, approaching the Bank of Japan’s 1% ceiling before trimming its advance. The BOJ will consider letting the yield temporarily climb above 1%, the Nikkei reported, without saying where it got the information. The yen’s slide last week to a fresh year-to-date low, rising yields and inflation stickiness have fueled speculation the BOJ will adjust its policy settings this week.

Asian stocks were mostly lower after a gauge of China’s factory activity slid back into contraction in October. Hong Kong and mainland Chinese shares both dropped and the offshore yuan weakened.

A tweak in Japan’s yield-curve control would have significant implications for global fund flows. Japanese investors are the biggest foreign holders of US government debt, and also own sizable amounts of European and Australian bonds, among other assets. Higher yields at home may lead Japanese institutions to sell overseas holdings and bring that cash home.

“There’s growing speculation about a tweak from BOJ today, and markets are seemingly underpricing the risks of an early normalisation,” Charu Chanana, a senior market strategist at Saxo Capital Markets, wrote in a note. “But simply raising the 10-year yield ceiling further from 1% may prove to be a costly and short-term fix, and may only bring modest gains for the yen.” 

The dollar gained versus all its G10 peers, while Treasuries were little changed. The US Treasury on Monday reduced its estimate for federal borrowing for the current quarter, citing stronger-than-expected revenue.

Australian bonds declined, pushing 10-year yields closer to 5%. The benchmark yield hasn’t breached that level since July 2011.

Oil edged higher in Asia after sliding on Monday due to signs the Israel-Hamas war will remain contained while demand may be softening.

Foxconn Industrial Internet Co. rose in Shanghai after reporting a higher-than-expected profit margin as it made more AI server-related products. Bank of China Ltd. also gained following its third-quarter results. Shares of Japanese banks rose 2.5% following the Nikkei report.


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