Singapore: The yen fell as the Bank of Japan began a meeting on Wednesday that may signal its readiness to further loosen monetary policy to support the economy, while the prospect of more cheap money from Tokyo helped boost shares elsewhere in Asia
Brent crude oil hovered below a two-and-a-half year high it struck amid war in Libya and unrest in the Middle East.
Gold sat just below its record as China’s fourth rate rise since October and oil prices fuelled concerns about inflation that helped propel the precious metal, traditionally a hedge against rising prices as well as a safe haven investment.
European shares were seen edging up, extending a rally that has taken them to their highest in nearly four weeks. Financial spreadbetters called the major European indexes to open 0.2-0.3% higher, while S&P 500 index futures pointed to modest gains on Wall Street after a flat finish on Tuesday.
The yen has been on a downward trend since a rare joint intervention by leading central banks to weaken it last month revived interest in the yen “carry trade” - a strategy of using cheap yen loans to fund higher yielding investments.
“The yen is weakening due to expectations for interest rates to rise abroad,” said Tsutomu Soma, senior manager at Okasan Securities’ foreign securities department in Tokyo.
“In countries other than Japan, there are moves towards raising interest rates or exiting from extreme monetary easing... But in Japan, a massive amount of funds have been pumped into the money market as an emergency measure.”
Japan’s Nikkei share average closed down 0.3%. A weaker yen ought to be positive for Japan’s heavyweight exporters, but investors remain concerned about production capacity knocked out by the devastating 11 March earthquake.
“The dollar going above ¥85 is a significant breakthrough,” said Hiroaki Osakabe, a fund manager at Chibagin Asset Management. “But carmakers and other manufacturers have to be able to produce at full capacity first to really feel positive impact. That’s why they’re not surging on the news.”
MSCI’s index of Asia Pacific shares outside Japan reached its highest in nearly three years. It rose 0.6%, led by a 1.5% gain for its tech sub-index . Shanghai stocks were up more than 1% and Taiwan shares gained 1.7%.
Market players said the yen carry trade was encouraging the foreign fund flows that often set the direction for emerging Asia stocks.
“Japan will be pumping lots of money into its financial system, which would lure foreign investors back to emerging markets such as South Korea and Taiwan,” said Robert Hsieh, an assistant vice president at Shin Kong Financial’s fund arm.
The Bank of Japan is expected to keep policy on hold at its two-day meeting that started on Wednesday, but signal its readiness to embark on further easing as damage from the earthquake threatens to tip the economy back into recession.
In contrast, there are strong expectations the European Central Bank will bump its key policy rate up 25 basis points from a record low 1% on Thursday to curb inflationary pressures, with markets already pricing in more tightening later in the year.
The euro bought around 121.60 yen , having rise as far as 121.89 yen, its highest in 11 months, and the Australian dollar was at 88.30 yen , having reached a two-and-a-half year high of 88.68 yen.
The dollar rose 0.6% to 85.35 yen, having scaled a six-month peak of 85.53 yen . The U.S. currency has surged 12% from its post-World War Two low of 76.25 yen hit in March, days after Japan’s northeast was devastated by the magnitude 9.0 earthquake and tsunami.
The euro traded around $1.4268 , matching a five-month high reached on Monday.
Minutes of last month’s Federal Reserve policy-setting meeting, released on Tuesday, showed the U.S. central bank appeared intent to complete a $600 billion bond-buying plan and to keep rates at exceptionally low levels for an extended period.
With both the Fed and BoJ keeping ultra-loose monetary policy in place, investors have been using the yen and dollar as funding currencies to buy higher yielding assets, including currencies tied to commodity markets such as the Australian dollar, or where policymakers are expected to allow appreciation to help dampen inflation.
“Foreign investors appear to be taking on a yen carry trade,” said Kim Soo-young, a market analyst at KB Investment & Securities in Seoul.
Copper prices rose in London and Shanghai futures jumped 1% after a two-day holiday.
Past Chinese rate rises have been seen as negative for stocks and commodities on the worry that a slowing economy might crimp China’s growing demand for industrial raw materials, manufacturing components and, increasingly, finished goods.
But the latest 25 basis point rise, announced by Beijing late Tuesday, was viewed as just the latest step in a tightening cycle which has been going on for some time and was expected to continue.
“The market has become comfortable with tighter Chinese policy,” said a metals trader in Singapore.
“We were looking at three rate rises this year so it’s not unexpected and they also seem to be in the habit of announcing these things during market holidays.”
Brent crude eased 0.2% to $122 a barrel, having jumped to a two-and-a-half year high on Tuesday. US crude weakened 0.2% to $108.17 a barrel.
Gold traded around $1,453.15 an ounce, after rising as far as $1,456.85 on Tuesday.
Japanese government bond futures fell, hurt by a slide in US Treasuries, with June 10-year futures down 0.29 point at 138.98, while the benchmark 10-year yield rose 2.5 basis point to 1.295%.