Friday 03.25 BST. Asian equities were mostly higher on Friday, taking cheer from the prospect of the US Federal Reserve continuing accommodative monetary policy.
Japanese stocks bucked the trend, however, as investors returned from a public holiday and the Bank of Japan adjusted its ¥5.7tn exchange traded fund buying programme.
Among the tweaks to monetary policy the BoJ announced on Wednesday was a decision to favour purchasing ETFs that track the market-capitalisation weighted Topix index over those that follow the price-weighted Nikkei 225.
The BoJ’s annual buying budget will be split into two sub-budgets worth ¥3tn and ¥2.7tn. The former pot will be managed as before, buying ETFs linked to three stock indices in proportion to market cap, but the ¥2.7tn will be allocated to ETFs tracking the Topix. According to Nomura, 70 per cent of the annual budget will now allocated to the Topix.
Akihiro Murakami, quantitative strategist at Nomura, highlighted that most managers would have built portfolios and managed risk under the assumption that the BoJ’s ETF buying would focus on the Nikkei 225.
That is likely to trigger unwinding and new purchases to match the BoJ’s new game plan. “Under such a scenario, we see potential for a market impact in an amount that is equivalent to the difference between the buying ratios under the new rule and the buying ratios under the old rule,” he said.
In Friday morning trade, the broad Topix benchmark was down 0.2 per cent while the Nikkei 225 was off 0.1 per cent, although both gauges had clawed back steeper declines from earlier in the session. The Topix leapt 2.7 per cent on Wednesday after the BoJ decision, but the market for both Japanese equities and government bonds was closed on Thursday for a public holiday.
The yield (which moves inversely to price) on the benchmark 10-year JGB was trading 1.9 basis points lower at minus 0.046 per cent. As part of the BoJ’s policy tweaks, it will cap yields on that bond at around zero per cent.
The yen was trading 0.4 per cent weaker on Friday at ¥101.20 per dollar. On Thursday, the currency closed lower, but had earlier flirted with the ¥100 mark for the first time in a month as traders remained unimpressed by the BoJ’s efforts.
“The BoJ’s change of interim policy target buys it a little more room for manoeuvre on policy going forward, which is clearly a good thing. But lowering the lower bound on short rates, may simply bring other policy constraints into focus,” said Adam Cole, FX strategist at RBC Capital Markets.
The other major central bank event this week was the Federal Reserve. The US central bank kept interest rates on hold, as expected, and left the door open to raising rates by the end of this year. However, the Fed dialled back expectations for rate rises next year — a move that has seen the US dollar weaken and Treasuries rally over the past three sessions.
In Asia on Friday, the dollar index —a measure of the US currency against a basket of global peers — was up 0.1 per cent at 95.52, but was heading for a 0.6 per cent decline for the week.
Gold, which is sensitive to monetary policy expectations, was down 0.1 per cent at $1,3335.45 an ounce — potentially its first decline in five sessions. Eyeing a 1.9 per cent gain over the past five days, gold was on track for its best weekly performance since the final week of July.
In other regional markets, Australia’s S&P/ASX 200 was up 0.6 per cent while Hong Kong’s Hang Seng gained 0.1 per cent. On the mainland, China’s Shanghai Composite was down 0.1 per cent and the tech-focused Shenzhen Composite was fell 0.2 per cent.
Overnight, the S&P 500 ended 0.7 per cent higher, while European stocks gained more than 2 per cent.
After strong gains through the middle of the week, oil prices weakened on Friday. Brent crude, the international benchmark, was down 0.9 per cent at $47.24 per barrel, while West Texas Intermediate shed 1.1 per cent to $45.80.
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