SYDNEY, Dec 5 (Reuters): Japan's Nikkei skidded on Friday, wiping out this week's gains amid an otherwise upbeat Asian performance as investors wait for a USinflation reading that could sway a deeply divided Federal Reserve.
The Nikkei 225 fell 1.3 per cent after weaker-than-expected household spending data underscored the scourge of inflation as bets of a rate hike later in the month grew. It was on track to end the week mostly flat.
The yield on 10-year Japanese government bonds hit 1.94 per cent early in the day, its highest since mid-2007, before pulling back to settle at 1.93 per cent.
The benchmark yield was on track for a 12.5 basis point rise this week, marking the steepest five-day climb since March, but recent strong auction results suggested the cheap bond prices are drawing buyers into the market.
"In previous cycles, moves of that size would have rattled markets. Instead, demand strengthened," said Nigel Green, chief executive at deVere Group. "Capital flows are shifting, long-standing expectations are being tested, and portfolios built around permanently cheap yen now face a very different world."
A quarter-point rate hike from the Bank of Japan later this month is now being priced at 75 per cent, after Governor Kazuo Ueda told investors on Monday the central bank would weigh the "pros and cons" of raising interest rates.
Sources have told Reuters that the Japanese government is prepared to tolerate a hike in December.
The dollar lost 0.3 per cent to 154.61 yen, and remained well off its 10-month high of 157.9.
The broader MSCI index of Asia-Pacific shares outside Japan was up 0.4 per cent and was set for a gain of 1 per cent for the week. Most regions were up a little but South Korea managed a decent rise of 1.4 per cent.
In foreign exchange markets, the dollar was under pressure again, having steadied overnight after falling for nine straight sessions. The dollar index was off 0.1 per cent on Friday to 99 against its major peers, and down 0.5 per cent for the week.
The broad weakness in the U.S. currency has been driven by wagers that the Federal Reserve is almost certain to cut interest rates by a quarter point next Wednesday.
While markets are 90 per cent priced for a Fed rate cut, it could be the most contentious decision in years for the central bank as many as five of the 12 voting members have publicly said they oppose reducing rates further.
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