San Francisco Frontiers - Yen holds gains, markets mixed after Bank of Japan move

The move to allow yields on certain government bonds to move in a wider band was seen as a precursor to a possible interest rate hike next year, finally bringing the central bank in line with others around the world.

Tuesday's announcement sent the yen soaring from above 137 to the dollar to just above 130 -- its strongest since August -- while it also rallied against other peers including the euro. And it managed to hold on to most of the advances on Wednesday.

And some observers say the Japanese unit could strengthen further to around 120, saying it remained relatively cheap, having tumbled for most of the year against the dollar owing to the divergence of Fed and BoJ policies.

"It would be safe to assume that the BoJ shift will likely fuel further yen strength on repatriation flows as local bond yields rise," Stephen Innes of SPI Asset Management said in a note.

"Effectively the BoJ pivot is the equivalent of quantitative tightening, which should lead real long-term rates to increase."

Regional markets mostly edged back up after a painful sell-off, though fears that borrowing costs will continue to rise globally next year were keeping any rally in check.

Tokyo fell again after dropping more than two percent Tuesday, while there were also losses in Shanghai, Mumbai, Singapore and Seoul.

But Hong Kong, Sydney, Wellington, Taipei, Manila, Bangkok and Jakarta all rose.

The surprise move came as investors were already suffering following hikes by the US Federal Reserve and European Central Bank last week, and warnings by officials that rates would likely go higher than initially expected.

The tightening measures, aimed at bringing decades-high inflation under control -- have fanned speculation that the world economy will be tipped into a recession.

"Tighter BoJ policy would remove one of the last global anchors that's helped to keep borrowing costs at low levels more broadly," said Deutsche Bank analysts.

And National Australia Bank's Ray Attrill added that Tuesday's "tweak has, whatever the BoJ (and government) will have us want to believe, been interpreted as putting the writing on the wall for a policy shift next year.

"It is also seen as signifying a formal end to tolerance/desirability of yen weakness."

Traders are also keeping an eye on China as it quickly reopens after almost three years of a zero-Covid policy of lockdowns and mass testing that hammered the world's number two economy.

However, there is a worry about the immediate impact of a spike in infections, with hospitals struggling, pharmacy shelves being stripped bare and crematoriums overwhelmed.

"Though unspoken, it is well understood that policymakers have decided to accept a sizeable Covid wave," said Innes.

"And beyond the Covid shift, Chinese policymakers have taken more decisive steps to support the economy, while broader macro policy continues to ease.

"The trade-off is to expect weaker oil demand through the Covid 'exit wave' across the country but possibly an above-consensus 2023 demand bounce on the accelerated pace of reopening."

Still, the expected bump in demand from China has helped push crude prices higher. A drop in US inventories also provided support, while the upcoming northern hemisphere winter is expected to further boost energy use.

- Key figures around 0710 GMT -

Tokyo - Nikkei 225: DOWN 0.7 percent at 26,387.72 (close)

Hong Kong - Hang Seng Index: UP 0.1 percent at 19,120.18

Shanghai - Composite: DOWN 0.2 percent at 3,068.41 (close)

Dollar/yen: UP at 132.05 yen from 131.69 yen on Tuesday

Euro/dollar: DOWN at $1.0615 from $1.0632

Pound/dollar: DOWN at $1.2161 from $1.2186

Euro/pound: UP at 87.28 pence from 87.21 pence

West Texas Intermediate: UP 0.3 percent at $76.48 per barrel

Brent North Sea crude: UP 0.5 percent at $80.41 per barrel

New York - Dow: UP 0.3 percent at 32,849.74 (close)

London - FTSE 100: UP 0.1 percent at 7,370.62 (close)

M.Gonzalez--SFF