Bank of Japan Governor Kazuo Ueda hinted at a possible interest rate hike in a speech on December 1, leading to rising bond yields and a stronger yen. This triggered a decline in the Nikkei stock average. Markets now see heightened odds of a hike at the central bank's December 19 policy meeting.
Bank of Japan Governor Kazuo Ueda, in a speech to local business leaders in Nagoya on December 1, stated that the central bank 'will consider the pros and cons of raising the policy interest rate and make decisions as appropriate' by examining the economy, inflation, and financial markets at home and abroad. He noted that the likelihood of the bank's economic outlook being realized is rising, and conditions would remain accommodative even after a rate hike. This was interpreted as the clearest signal yet for a possible hike at the December 19 policy meeting.
Markets reacted swiftly. The two-year note yield rose one basis point to 1.00%, its highest since 2008. Yields on five-year and 10-year bonds climbed four basis points each to 1.35% and 1.845%, hitting 17-year highs. The yen strengthened as much as 0.4% to 155.49 against the dollar.
In stocks, the Nikkei average fell 1.68% to 49,407.31 by midday, ending a four-session winning streak after seven straight monthly gains in November. The broader Topix lost 1.01% to 3,344.48. Kazuaki Shimada, chief strategist at IwaiCosmo Securities, said, 'There were hardly any big market-moving cues, but the market reacted to rising yields and the yen’s gain against the dollar. The market tended not to react to the yen’s moves lately, but today’s session was different.' Chip-testing equipment maker Advantest dropped 4.37%, dragging the index, while Fast Retailing fell 1.58%. Banks rose on hike bets, with Sumitomo Mitsui Financial Group up 2.75% and Mitsubishi UFJ Financial Group climbing 2.33%. Of Tokyo's 33 industry sub-indexes, 31 declined, with energy explorers down 3.55% as the worst performer and banks up 1.96% as the best.
The overnight swap index shows a 64-76% chance of a December hike, rising to 90% by January.
