Japan’s Nikkei Slides as Rate-Hike Expectations Strengthen; Asia Stocks Subdued

Key Takeaways

• Japan’s Nikkei fell 1.5% as weak household spending deepened expectations of a BOJ rate hike.

• Japan’s 10-year bond yield hit 1.94%, the highest since 2007.

• Markets now price a 75% chance of a BOJ rate hike in December.

• Asian markets were broadly subdued, with mixed performance across major indices.

• Investors await the delayed US PCE inflation report, expected to show core inflation rising 0.2 percent.

• Fed funds futures imply almost a 90% chance of a rate cut next week despite divisions within the Fed.

Japan’s Nikkei 225 fell sharply on Friday, erasing its weekly gains as weak household spending data reinforced concerns about inflation and strengthened expectations of a Bank of Japan (BOJ) rate hike later this month.

The index dropped 1.5%, placing it on track for a flat week. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1% but remained up 0.5% for the week.

Japan’s household spending in October posted its largest decline in nearly two years, as rising prices continued to erode purchasing power. The yield on 10-year Japanese government bonds (JGBs) touched 1.94%, the highest since mid-2007, and is heading for a 13.5-basis-point weekly rise — the steepest five-day move since March.

Despite the sharp yield climb, stronger demand at recent bond auctions indicates cheaper prices are attracting buyers.

“In previous cycles, moves of that size would have rattled markets. Instead, demand strengthened,” said Nigel Green, CEO at deVere Group. “Capital flows are shifting and long-standing expectations around the yen are being challenged.”

The yen held steady at 155 per dollar, recovering from last week’s 10-month low of 157.9.

Markets now price a 75% chance of a BOJ rate hike this month after Governor Kazuo Ueda said the central bank would weigh the “pros and cons” of raising rates. Sources told Reuters the Japanese government is prepared to tolerate a December hike.

Elsewhere in Asia, sentiment was muted. Hong Kong’s Hang Seng fell 0.5%, Australia’s resource-heavy shares were flat, while South Korea’s Kospi rose 0.7%.

Markets Await US Inflation Data

The US dollar steadied after nine straight sessions of declines, trading around 99 against major currencies. It remains 0.5% lower for the week ahead of the release of the delayed US personal consumption expenditures (PCE) index for September.

Economists expect a 0.2% rise in core PCE, leaving annual core inflation at 2.9%.

The US non-farm payrolls report will not be released on Friday due to delays caused by the government shutdown. Thursday’s jobless claims data showed a sharp drop in claims, though analysts cautioned the Thanksgiving holiday likely distorted the figures.

Fed funds futures show nearly a 90% probability of a rate cut next Wednesday, despite vocal opposition from several policymakers. Analysts at ANZ said tariffs have slowed progress on inflation but the broader disinflation trend remains intact.

Bonds and Commodities

Treasury yields eased slightly after rising on Thursday:

• Two-year yield: down 1 bp to 3.519%

• 10-year yield: down 2 bps to 4.092%

Commodity markets were steady. Brent crude was unchanged and on track for a flat week, while spot gold was poised to end the week 0.8% lower at US$4,198 per ounce.