LONDON/SYDNEY, Dec 19 (Reuters): Japanese government bond yields jumped and the yen weakened on Friday after the Bank of Japan raised interest rates to a three-decade high and left the door wide open to further tightening.
Global stocks were muted with Europe's STOXX 600 edging 0.1% lower and failing to match strong trading sessions in Asia and the US overnight. Wall Street futures pointed to gains of between 0.1% and 0.3%, after rallying Thursday on stellar results from chipmaker Micron Technology.
Investors were also digesting news that the European Union would provide Ukraine with 90 billion euros ($105.4 billion) of support over the next two years, but failed to agree on an ambitious plan to use frozen Russian assets to finance this.
The BOJ's widely expected rate hike led investors to sell the yen on the fact and drove some profit-taking. The dollar was last up 1.1% on the yen at 157.3., prompting traders to consider the chances of official intervention to support the currency. Japan's 10-year government bond yield hit a 26-year peak and the Nikkei closed up 1%.
The BOJ's decision to raise short-term rates to 0.75% marks another step in ending decades of huge monetary support in the country. Analysts said it would need to plot a careful path to manage inflation as Japan's new government prepares major fiscal stimulus.
"Markets expect the Bank of Japan will have to raise rates more," said Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management. "That extra fiscal spending might continue to weaken the yen, which exacerbates inflation." Capital Economics senior economist Abhijit Surya said he expected BOJ rates reaching 1.75% by 2027.
Wider sentiment got a boost from a surprise slowdown in US consumer price inflation to 2.7%, though analysts cautioned the data were clearly distorted lower by the government shutdown and could not be taken at face value.
Pricing for the Federal Reserve moved only marginally with a rate cut in January implied at just 24%, while 10-year Treasury yields were at 4.1471%, some way from the recent 3-1/2-month top of 4.209%.
Overnight, British bonds had taken a hit after the Bank of England cut rates as expected but only after a very tight 5-4 vote. Policymakers also signalled caution about the pace of future easing and another cut is now not fully priced in until June.
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