Asian stocks settled near one-year highs today while the safe-haven yen slumped after Japan's government announced a larger-than-expected economic stimulus package, which led most of the region's bourses higher.
Japanese Prime Minister Shinzo Abe said today his government would compile a stimulus package of more than $265 billion to reflate the flagging economy, media reported, though it is unclear how much will be spent to directly boost growth. This would be more than expected earlier, but critics will be watching to see how much is actually new spending.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1 per cent, reversing earlier gains, having previously climbed to its highest level since August 11, 2015. It has risen 10 per cent so far this month. Japan's Nikkei rose nearly 2 per cent, leading the region higher. However, mainland China stock indexes bucked the regional rally, falling 2 to 4 per cent in midday trade on worries about regulatory restrictions.
There is a near-consensus view among traders that the Bank of Japan (BOJ) will ease on Friday, most likely by ramping up its already massive purchases of government bonds and riskier assets.
Cutting interest rates into negative territory has proved unpopular with the public and the government, so deepening those cuts is a less likely option, sources familiar with central bank thinking say.
But some market watchers say the BOJ decision is too close to call with many central bank policymakers preferring to hold off on action as they expect a fiscal stimulus package and a delay in next year's sales tax hike to boost growth.
Major central banks attempting to reflate economy
Pressured by the weakness in Chinese shares, Hong Kong stocks also declined 0.4 per cent though mainland Chinese investors continued to snap up shares through a stock market connection scheme. "Pockets of the world where yield and growth are present will continue to be rewarded by investors," said Daniel Morris, a senior investment strategist at BNP Paribas Investment Partners, citing India, Indonesia and China consumer-focused plays among his top picks.
"Still, we are cautious on the second half and we don't think central banks will rush into tightening policy with the global growth outlook bleak and uncertain," he said.
Since the global financial crisis, major central banks have inflated their balance sheets and injected trillions of dollars to reflate their economies. On a monthly basis, they are adding about $180 billion into the world's financial system led by the ECB and the BOJ, according to Deutsche Bank.
On Tuesday, US equity markets closed mixed while stocks in Europe traded slightly higher with all eyes were on the Fed, which concludes its two-day policy meeting later today.
The US central bank is widely expected to stand pat on monetary policy and the markets will sift through its statements - a post-meeting news conference will not be held - for any hints of the timing on future interest rate hikes. Expectations of a September increase are clouded ahead of the U.S. presidential election in November, but markets see a roughly 50-50 chance of a rise in December.
Lowdown on currency markets
Price action was messy in currency markets, triggered by Australian price data where core inflation stayed at a record trough, though major pairs clung to well worn trading ranges.
The Australian dollar was a shade weaker at 0.7488 after rising to as high as 0.7568 after the data. Investors slightly reduced the odds of a cut next week to 50 per cent, from 60 per cent before the data.
The dollar was up slightly against a basket of currencies on a trade weighted basis nearing five-month high it hit last week.
Against the yen, it was up 1 per cent at 105.65 after tanking more than 1 per cent overnight.
"It's good for equities. It's good for risk," said Stephen Innes, senior trader for FX broker OANDA in Singapore. "There's still room for disappointment from the Bank of Japan."
The euro stood steady at $1.0995 after edging up 0.3 per cent overnight thanks to the greenback's broad retreat versus the yen.
The pound edged up 0.1 per cent to $1.3114 after touching a two-week low of $1.3057 overnight following dovish statements from Bank of England policymaker Martin Weale.
In commodity markets, crude oil extended losses after suffering big hits overnight on renewed concerns about oversupply. US crude was down 0.05 percent at $42.88 a barrel. The contracts had touched $42.36 on Tuesday, their lowest in three months.
Trade group American Petroleum Institute (API) said Tuesday that US crude stockpiles fell by 827,000 barrels last week, much less than analysts' expectations for a drawdown of 2.3 million barrels.