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Yen set for biggest weekly gain since July; BOJ hike odds soar while Tokyo inflation exceeds 2% target

Asian stocks advanced on November 29 as the yen strived for its four-month high after the higher inflation rates in Japan stock market. Investors expect BOJ (Bank of Japan) to raise interest rates, much earlier than expected due to rising inflation and falling yen.

Market Performance

The MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.4% with the Chinese blue-chip index soaring by 2%. Meanwhile, Japan’s Nikkei slipped 0.3% after being weighed down by the yen. The Nikkei dropped over 2% and was at its weakest in November since April.

In the currency market, the yen strengthened nearly 1% to 150.14 per dollar, briefly hitting its highest level since October 21 at 149.77. People also reinvested their export earnings at a faster rate, reducing the dollar’s demand. This week also saw the dollar lose 3% of its value against the yen – the biggest drop since late July. Current traders’ expectation is at 60% that BOJ will increase the rate in December, a complete change from their hesitation earlier.

According to Reuters, a note from analysts at ING stated, “We note that the acceleration in inflation, combined with the solid recovery in monthly activity, increases the odds of another BOJ rate hike in December.”

Inflation and Central Bank Policies

Core consumer prices in Japan’s capital city Tokyo rose in November, targeting the inflationary barrier set by the BOJ at 2%. The data amplified calls for the central bank to act decisively. Moreover, a strong economic recovery and apprehensions about the yen depreciation further added to the urgency.

However, no clear direction was available from the US markets where all the markets were closed on account of the Thanksgiving holiday. Wall Street futures rose 0.5% in Asian trade while the European markets opened modestly mixed. EUROSTOXX 50 futures were down 0.1%  and FTSE futures were up 0.11%.

International Flow of Yields and Commodities

Treasury yields fell slightly as the cash market returned in Japan after a holiday. The 10-year yield declined 2 basis points to 4.240 % - the lowest it has been in a month — while it fell by 17 basis points this week — the greatest weekly decline since September. Expectations of a December rate cut by the US Federal Reserve are also on the rise, with the likelihood rising to 63% from 55%, a week earlier.

Crude oil rose 0.6% on November 29, with West Texas Intermediate (WTI) crude closing at US $69.12 per barrel. Yet, oil was on course for a nearly 3% weekly decline due to reduced geopolitical risks in the Middle East region. Gold was up 0.8% at US $2,662.36 an ounce, but is set for a 3% monthly loss – the lowest in over a year.

This week’s movements highlight changing global monetary policies and inflation rates with markets preparing for new actions by central banks.