By Tom Westbrook
SYDNEY Asian stocks were off five-month highs and the yen extended a sharp rally on Friday with speculation that the Bank of Japan could take another small step toward dismantling its super-easy stimulus policies.
The BOJ sets policy later in the session. The Nikkei newspaper reported, without citing sources, that policymakers will discuss tweaking the yield control policy to allow 10-year government bond yields above a 0.5% cap in some circumstances.
The yield leapt to 0.505% in early trade.
The yen had earlier jumped about 0.5% on the report, gaining even as the dollar rose elsewhere after strong U.S. economic data and a toned down outlook from the European Central Bank.
The yen was holding about 0.5% higher at 138.83 per dollar in early trade, helped by Tokyo consumer prices rising slightly more than expected and as the risk of a policy surprise spooked short sellers.
"I wouldn't be running short into the BOJ," said Westpac strategist Imre Speizer.
"I think the idea is even a tiny tweak is a big deal for the BOJ. We'll probably get a reaction either way."
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4%. Japan's Nikkei opened 1.4% lower though bank shares surged to an eight-year high on the prospect of rising interest income at lenders.
"If the BOJ adjusts its yield curve control program, financial markets will likely take it as the start of a policy tightening cycle regardless of the BOJ's rationale," said Commonwealth Bank of Australia strategist Kristina Clifton.
"Under such scenario, we consider dollar/yen ... can lose about two to four yen on the day."
A tweak would also cap what may prove a landmark week for central banks, with markets pricing a better-than-even chance that the Federal Reserve and ECB have made their final hikes of the cycle.
On Thursday, the ECB raised rates by 25 basis points to a 23-year high, as expected, but President Christine Lagarde sent the euro tumbling with talk of a pause in September.
"Do we have more ground to cover? At this point in time I wouldn't say so," Lagarde told reporters. The euro slid nearly 1% overnight and nursed losses at $1.0980 on Friday.
On Wednesday, the Fed had also hiked by 25 bps and Chair Jerome Powell cheered investors when he said the central bank's staff no longer forecast a recession.
Further strong U.S. data, with better-than-expected second-quarter growth figures out overnight drove up longer-end Treasury yields and the U.S. dollar.
Ten-year yields rose 16 basis points and broke above 4%. They were steady at 4.006% in Asia trade.
S&P 500 futures tacked on 0.1% and Nasdaq 100 futures added 0.2%, helped by an after-market jump in shares of Intel which reported a surprise quarterly profit.
Brent crude oil futures slipped slightly from three-month highs to $83.63 a barrel.
(Editing by Shri Navaratnam)
