The yen edged near a two-week high on the dollar and
seven-week highs against the Australian dollar, with some
traders speculating selling was mostly from algorithm players,
who often execute trades based on correlation patterns of the
past.

The dollar fell 0.3 percent to 101.63 yen, and was
down 2.0 percent from Wednesday’s 4-1/2-year high of 103.74 yen.
A break of its two-week low of 100.83 yen hit on Thursday could
open the way for a test of the 100 yen mark.

The Nikkei share average ended up 0.9 percent after
falling sharply at one point in a replay of its dive on
Thursday, the biggest percentage fall in two years.

“This is deja vu. People were afraid and selling the
dollar,” said a trader at a Japanese bank, referring to the
Nikkei’s tumble on Thursday.

The yen has dropped sharply this year and the Nikkei has
surged around 45 percent on the back of Japanese Prime Minister
Shinzo Abe’s prescription of aggressive monetary and fiscal
stimulus.

Many traders view the latest setback for dollar/yen and
Japanese shares as merely a correction rather than a sign that
the magic of “Abenomics” was wearing off.

“Adjustments are an important part of the market. You can’t
have a one-way move forever. So yesterday’s big adjustment was
necessary, I think. But if the Nikkei rebounds, it will become
easier to buy the dollar,” said Bart Wakabayashi, head of forex
at State Street Global Markets.

Junya Tanase, chief currency strategist at JPMorgan Chase,
said the dollar fell about three percent on average in four
instances during the bull market of 2003-2007 when Japanese
shares declined more than four percent.

“Based on that average, the Nikkei could need about 20
sessions to recover the losses and the dollar/yen could fall
around three percent during that process,” Tanase said.

“But even if the adjustment phase drags on, the dollar/yen
is unlikely to fall much beyond 100 yen,” he added.

EURO EYES IFO

Analysts also note that the dollar is generally being
supported by expectations that the U.S. Federal Reserve is
inching towards tapering its bond buying after Chairman Ben
Bernanke on Wednesday suggested this could happen in one of the
next few policy meetings.

“The battleground has shifted to the U.S. economy. The
market will scrutinise whether the U.S. economy is strong enough
for the Fed to taper its bond buying,” said Katsunori Kitakura,
associate general manager of market making at Sumitomo Mitsui
Trust Bank.

Data showed on Thursday that U.S. initial jobless claims
dropped more than expected.

The dollar index, which measures the currency’s value
against a basket of six other major currencies, stood at 83.765
, almost flat on the day and near a three-year high of
84.498 hit on Thursday.

The euro eased 0.1 percent to $1.2917, though it kept
some distance from a six-week low of $1.2796 hit last week, with
immediate focus on Germany’s Ifo business sentiment index due at
0800 GMT.

The growing view that the Fed will take its foot off the
bond-buying scheme pedal is hurting the Australian dollar, which
has been a magnet for funds looking for higher yields.

The Aussie fell 0.5 percent to $0.9685, with its
2012 low of $0.9581 seen as critical support. On Thursday, it
fell to as low as $0.9593.

The Aussie also fell more than one percent against the yen
to 98.34 yen, having fallen as low as 97.31 yen on
Thursday, its lowest level since April 4.

The massive fall in shares caught markets by surprise but
traders are starting to conclude that it was a merely a
correction, and it cannot be denied the Bank of Japan’s strong
stimulus will weaken the yen over the long term.

“Adjustments are an important part of the market. You can’t
have a one-way move forever. So yesterday’s big adjustment was
necessary, I think. But if the Nikkei rebounds, it will become
easier to buy the dollar,” said Bart Wakabayashi, head of forex
at State Street Global Markets.

The Nikkei rose 2.7 percent in early Friday trade. Overnight
on Wall Street, U.S. stocks slipped but finished sharply off
their session lows.

The dollar tacked on 0.3 percent on Friday to 102.28 yen
, rebounding sharply after having fallen to a two-week low
of 100.83 yen on Thursday.

It wasn’t far off a 4-1/2-year high of 103.74 yen hit
earlier this week.

The yen has dropped sharply this year and the Nikkei has
surged around 45 percent on the back of Japanese Prime Minister
Shinzo Abe’s prescription of aggressive monetary and fiscal
stimulus.

“There’s no change in the accommodative monetary
environment. Correction may be already over,” said Hideki
Amikura, manager of forex at Nomura Trust Bank.

Currency traders are likely to keep an eye on Japanese
shares for now, given the high inverse correlation between the
yen and Japanese shares in recent months.

Junya Tanase, chief currency strategist at JPMorgan Chase,
said the dollar fell about three percent on average in four
instances during the bull market of 2003-2007 when Japanese
shares declined more than four percent.

“Based on that average, the Nikkei could need about 20
sessions to recover the losses and the dollar/yen could fall
around three percent during that process,” Tanase said.

“But even if the adjustment phase drags on, the dollar/yen
is unlikely to fall much beyond 100 yen,” he added.

Analysts also note that the dollar is generally being
supported by expectations that the U.S. Federal Reserve is
inching towards tapering its bond buying after Chairman Ben
Bernanke said on Wednesday suggested this could happen in one of
the next few policy meetings.

“The battleground has shifted to the U.S. economy. The
market will scrutinise whether the U.S. economy is strong enough
for the Fed to taper its bond buying,” said Katsunori Kitakura,
associate general manager of market making at Sumitomo Mitsui
Trust Bank.

The dollar index, which measures the currency’s value
against a basket of six other major currencies, stood at 83.88
, up 0.1 percent on the day and near a three-year high of
84.498 hit on Thursday.

The euro eased 0.1 percent to $1.2917, though it kept
some distance from a six-week low of $1.2796 hit last week.

The growing view that the Fed will take its foot off the
bond-buying scheme pedal is hurting the Australian dollar, which
has been a magnet for funds looking for higher yields.

The Aussie fell 0.7 percent to $0.9667, edging
closer to a one-year low of $0.9593 hit on Thursday.

The Australian unit was also pressured by China’s factory
activity for May, which shrank for the first time in seven
months, deepening fears that the recovery in the world’s
second-largest economy has stalled.

Global stocks and commodities markets sold off on Thursday, led by Japanese stocks suffering their worst one-day loss in two years, as investors were spooked by weak Chinese factory activity data and the prospect of an earlier-than-expected roll-back of U.S. stimulus.

“Adjustments are important part of the market. You can’t have a one-way move forever. So yesterday’s big adjustment was necessary, I think. But if the Nikkei rebounds, it will become easier to buy the dollar,” said Bart Wakabayashi, head of forex at State Street Global Markets.

The Nikkei rose 1.5 percent in early Friday trade. Overnight on Wall Street, U.S. stocks slipped but finished sharply off their session lows.

The dollar tacked on 0.4 percent in early Asian trade on Friday to 102.40 yen, rebounding sharply after having fallen to two-week low of 100.83 yen on Thursday. It wasn’t far off a 4 1/2-year high of 103.74 yen hit earlier this week.

The yen has dropped sharply this year and the Nikkei has surged around 45 percent on the back of Japanese Prime Minister Shinzo Abe’s prescription of aggressive monetary and fiscal stimulus. On Thursday, the rapid escalation in risk-aversion in global markets drove investors to the safe-haven yen, providing a brief boost to yen-bulls.

Given the high correlation between the Nikkei and the dollar/yen since late last year, the U.S. currency is likely to take cues from Japanese shares in the near term, analysts said.

Junya Tanase, chief currency strategist at JPMorgan Chase, said the dollar fell about three percent on average in four instances during the bull market of 2003-2007 when Japanese shares declined more than four percent.

“Based on that average, the Nikkei could need about 20 sessions to recover the losses and the dollar/yen could fall around three percent during that process,” Tanase said.

“But even if the adjustment phase drags on, the dollar/yen is unlikely to fall much beyond 100 yen,” he added.

Analysts also note that the dollar is generally being supported by expectations that the U.S. Federal Reserve is inching towards tapering its bond buying after Chairman Ben Bernanke said on Wednesday suggested this could happen in one of the next few policy meetings.

The euro eased 0.2 percent to $1.2909.

The growing view that the Fed will take the foot off the bond-buying scheme is hurting the Australian dollar, which has been a magnet for funds looking for higher yields.

The Aussie fell 0.7 percent to $0.9667, edging closer to one-year low of $0.9593 hit on Thursday.

The Australian unit was also pressured by China’s factory activity for May, which shrank for the first time in seven months, deepening fears that the recovery in the world’s second-largest economy has stalled.

(Reporting by Hideyuki Sano; Editing by Shri Navaratnam)

Global stocks and commodities markets sold off on Thursday,
led by Japanese stocks suffering their worst one-day loss in
two years, as investors were spooked by weak Chinese factory
activity data and the prospect of an earlier-than-expected
roll-back of U.S. stimulus.

“Adjustments are important part of the market. You can’t
have a one-way move forever. So yesterday’s big adjustment was
necessary, I think. But if the Nikkei rebounds, it will become
easier to buy the dollar,” said Bart Wakabayashi, head of forex
at State Street Global Markets.

The Nikkei rose 1.5 percent in early Friday trade.
Overnight on Wall Street, U.S. stocks slipped but finished
sharply off their session lows.

The dollar tacked on 0.4 percent in early Asian trade on
Friday to 102.40 yen, rebounding sharply after having
fallen to two-week low of 100.83 yen on Thursday. It wasn’t far
off a 4 1/2-year high of 103.74 yen hit earlier this week.

The yen has dropped sharply this year and the Nikkei has
surged around 45 percent on the back of Japanese Prime Minister
Shinzo Abe’s prescription of aggressive monetary and fiscal
stimulus. On Thursday, the rapid escalation in risk-aversion in
global markets drove investors to the safe-haven yen, providing
a brief boost to yen-bulls.

Given the high correlation between the Nikkei and the
dollar/yen since late last year, the U.S. currency is likely to
take cues from Japanese shares in the near term, analysts said.

Junya Tanase, chief currency strategist at JPMorgan Chase,
said the dollar fell about three percent on average in four
instances during the bull market of 2003-2007 when Japanese
shares declined more than four percent.

“Based on that average, the Nikkei could need about 20
sessions to recover the losses and the dollar/yen could fall
around three percent during that process,” Tanase said.

“But even if the adjustment phase drags on, the dollar/yen
is unlikely to fall much beyond 100 yen,” he added.

Analysts also note that the dollar is generally being
supported by expectations that the U.S. Federal Reserve is
inching towards tapering its bond buying after Chairman Ben
Bernanke said on Wednesday suggested this could happen in one of
the next few policy meetings.

The euro eased 0.2 percent to $1.2909.

The growing view that the Fed will take the foot off the
bond-buying scheme is hurting the Australian dollar, which has
been a magnet for funds looking for higher yields.

The Aussie fell 0.7 percent to $0.9667, edging
closer to one-year low of $0.9593 hit on Thursday.

The Australian unit was also pressured by China’s factory
activity for May, which shrank for the first time in seven
months, deepening fears that the recovery in the world’s
second-largest economy has stalled.

Stock and bond markets took their cue from the drop in U.S.
equities and Treasuries after Bernanke’s remarks at a
Congressional hearing sparked worries of an earlier than
expected reduction in U.S. monetary stimulus.

A weak manufacturing survey from China added to concerns
about a delayed recovery in the world’s second-largest economy
and furthered those losses, dragging MSCI’s broadest index of
Asia-Pacific shares outside Japan down 2.1
percent.

Japan’s Nikkei index was volatile, being up 1.5
percent at one stage and down nearly 6 percent in later trading.

Bookmakers expected European shares would decline sharply.
Alpari forecast Britain’s FTSE 100 to open 1.1 percent
lower, Germany’s DAX to fall 111 points or 1.3 percent,
and France’s CAC 40 to drop 35 points, or 0.9 percent.

The dollar hit a near three-year high against a basket of
currencies at 84.498 and an 11-month high versus the
Australian dollar.

“There is dollar buying on the back of superior growth
prospects in the U.S. economy and eventual tightening of
monetary policy,” said Gareth Berry, a currency strategist with
UBS in Singapore.

“But just because the dollar is rallying does not mean we
are in a risk-off world.”

In testimony to Congress on Wednesday, Bernanke said a
decision to scale back the $85 billion in bonds the Fed buys
each month could be taken at one of the central bank’s “next few
meetings” if the economy looked set to maintain momentum.
.

Financial markets interpreted the comments as hawkish, even
though Bernanke made clear the Fed needs to see further
improvement in the economy before reducing stimulus. Minutes
from the Fed’s latest meeting, released on Wednesday, also
showed most policy members had set the bar for the onset of
policy tightening pretty high.

“The Fed hasn’t tightened policy in any way since pre-GFC,”
said Westpac’s FX strategist Sean Callow, referring to the 2008
global financial crisis.

“And most equity markets have had a great run and consensus
was Ben would sound like Dudley – don’t worry, more dollars
coming,” he said, referring to New York Fed President William
Dudley who has been openly dovish.

Wall Street stocks posted their biggest daily decline since
May 1. The U.S. 10-year Treasury yield hit a two-month high of
2.069 percent earlier on Thursday and last stood at
2.02 percent.

That affected Asian credit markets, causing the spread on the
iTraxx Asia ex-Japan investment-grade credit default swap index
to widen by four basis points.

NIKKEI, JGBS

The Nikkei average tumbled 5 percent to 14,808.6 after
initially surging to a fresh 5-1/2 year high, rattled by the
drop on JGBs as well as the weak factory activity in China, one
of Japan’s major export markets.

That spurred a round of yen-buying as investors reduced
heavy bets on weakness in the Japanese currency, pushing the
dollar down 0.8 percent to 102.3 yen and off Wednesday’s
high of 103.74, the greenback’s strongest level since October
2008.

Japanese government bond (JGB) prices dived as a surge in
U.S. Treasury yields extended the bearishness in Japan’s bond
market, which has suffered a steep selloff after the Bank of
Japan unleashed massive monetary stimulus last month to boost
inflation.

“Bernanke seems to be leaning towards reducing bond
purchases, which was a bit of surprise,” said Tadashi Matsukawa,
head of fixed-income at Pinebridge Investments in Tokyo.

“In addition, the Bank of Japan didn’t offer any concrete
steps to calm the JGBs.”

Bernanke’s comments came just after BOJ chief Haruhiko
Kuroda disappointed JGB players by offering only lip service to
worries about the recent rises in JGB yields and reiterated they
could naturally rise when the economy improves.

The 10-year JGB yield rose to 1.000 percent,
its highest level since early April last year, and last stood at
0.855 percent or down 3 basis points on the day.

The 10-year JGB yield has more than tripled from a record
low of 0.315 percent hit on April 5, the day after the BOJ
unveiled its unprecedented monetary expansion.

To appease nervous investors, the BOJ offered 2.0 trillion
yen ($19.4 billion) cash in one-year contracts, a type of market
operation the BOJ has used a few times in recent weeks when it
wanted to reduce volatility in JGBs market though with limited
success.

SEA OF RED

Shares in Hong Kong were headed for their worst daily
loss in seven weeks on Thursday, mimicking losses across Asia
after China’s flash HSBC Purchasing Managers’ Index (PMI) for
May fell to 49.6, slipping under the 50-point level demarcating
expansion from contraction for the first since October.

Emerging Asian currencies fell against the dollar with the
South Korean won down 1.2 percent and the Philippine
peso losing nearly 1 percent.

The weak PMI for China added to pressure on the Australian
dollar, which fell to its lowest level since June 2012 at
$0.9626.

In commodities markets, Brent crude slid 0.7 percent to
$101.88 a barrel, while gold was up 0.3 percent
at$1,372.31 an ounce.

Bernanke’s comments, suggesting the Fed’s massive bond purchases could be scaled back in the next few policy meetings if the economy improves further, triggered a reaction across a swathe of markets, lifting the dollar to a three-year high versus a basket of currencies and the U.S. 10-year Treasury yield to the highest in two months.

Asian shares fell and extended their losses after a survey showed that China’s factory activity shrank for the first time in seven months in May, adding to concerns that a recovery in the world’s second-largest economy is sputtering.

JGB prices dived as a surge in U.S. Treasury yields added to the woes of Japan’s bond market, which has suffered a steep selloff after the BOJ unleashed massive monetary stimulus last month to boost inflation.

“Bernanke seems to be leaning towards reducing bond purchases, which was a bit of surprise. In addition, the Bank of Japan didn’t offer any concrete steps to calm the JGBs,” said Tadashi Matsukawa, head of fixed-income at Pinebridge Investments in Tokyo.

In testimony to Congress on Wednesday, Bernanke said a decision to scale back the $85 billion in bonds the Fed buys each month could be taken at one of the central bank’s “next few meetings” if the economy looked set to maintain momentum.

Bernanke’s comments came just after BOJ chief Haruhiko Kuroda disappointed JGB players by offering only lip service to the recent rises in JGB yields and reiterated they could naturally rise when the economy improves.

The 10-year JGB yield rose to 1.000 percent, its highest level since early April last year, and last stood at 0.955 percent up 7 basis points on the day.

The 10-year JGB yield has more than tripled from a record low of 0.315 percent hit on April 5, the day after the BOJ unveiled its unprecedented monetary expansion.

To appease nervous investors, the BOJ offered 2.0 trillion yen cash in one-year contract, a type of market operation the BOJ has used a few times in recent weeks when it wanted to reduce volatility in JGBs market though with limited success.

The U.S. 10-year Treasury yield hit a two-month high of 2.069 percent earlier on Thursday and last stood at 2.044 percent.

GRAPHICS

Latest economic indicators link.reuters.com/vaf35t

G4 currencies since 2007 link.reuters.com/mem28t

Commodities in 2013 link.reuters.com/reb25t

In the stock market, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.5 percent.

MSCI’s index extended its losses after the flash HSBC Purchasing Managers’ Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October.

Japan’s benchmark Nikkei share average showed some very choppy moves. The Nikkei was last up 0.2 percent on the day after rising 2 percent earlier and hitting a 5-1/2 year high.

“The focus today is that the yen pushed to 103 last night on the back of comments out of the U.S.,” said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo.

The dollar held steady against the yen at 103.12 yen, having hit a high of 103.74 yen on Wednesday, the greenback’s strongest level versus the Japanese currency since October 2008.

Highlighting its broad strength in the wake of Bernanke’s comments, the dollar hit a near three-year high against a basket of currencies at 84.498 and touched an 11-month high versus the Australian dollar.

The weak HSBC flash PMI for China added to pressure on the Australian dollar, which fell to its lowest level since June 2012 at $0.9626.

“The Aussie fall was in reaction to Bernanke’s testimony and it will go on for a while longer,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney.

“I see a drop below $0.9600 but with good support at $0.9581. If the U.S. bond markets continue to sell off, then the Aussie could test 90 cents,” he added.

In commodities markets, Brent crude slid 0.6 percent to $102.02 a barrel, while gold eased 0.1 percent to $1,367.81 an ounce.

(Additional reporting by Hideyuki Sano and Dominic Lau in Tokyo, Cecile Lefort in Sydney; Editing by Eric Meijer)

Bernanke’s comments, suggesting the Fed’s massive bond purchases could be scaled back in the next few policy meetings if the economy improves further, triggered a reaction across a swathe of markets, lifting the dollar to a three-year high versus a basket of currencies and the U.S. 10-year Treasury yield to the highest in two months.

Asian shares fell and extended their losses after a survey showed that China’s factory activity shrank for the first time in seven months in May, adding to concerns that a recovery in the world’s second-largest economy is sputtering.

JGB prices dived as a surge in U.S. Treasury yields added to the woes of Japan’s bond market, which has suffered a steep selloff after the BOJ unleashed massive monetary stimulus last month to boost inflation.

“Bernanke seems to be leaning towards reducing bond purchases, which was a bit of surprise. In addition, the Bank of Japan didn’t offer any concrete steps to calm the JGBs,” said Tadashi Matsukawa, head of fixed-income at Pinebridge Investments in Tokyo.

In testimony to Congress on Wednesday, Bernanke said a decision to scale back the $85 billion in bonds the Fed buys each month could be taken at one of the central bank’s “next few meetings” if the economy looked set to maintain momentum.

Bernanke’s comments came just after BOJ chief Haruhiko Kuroda disappointed JGB players by offering only lip service to the recent rises in JGB yields and reiterated they could naturally rise when the economy improves.

The 10-year JGB yield rose to 1.000 percent, its highest level since early April last year, and last stood at 0.955 percent up 7 basis points on the day.

The 10-year JGB yield has more than tripled from a record low of 0.315 percent hit on April 5, the day after the BOJ unveiled its unprecedented monetary expansion.

To appease nervous investors, the BOJ offered 2.0 trillion yen ($19.4 billion) cash in one-year contract, a type of market operation the BOJ has used a few times in recent weeks when it wanted to reduce volatility in JGBs market though with limited success.

The U.S. 10-year Treasury yield hit a two-month high of 2.069 percent earlier on Thursday and last stood at 2.044 percent.

In the stock market, MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 1.5 percent.

MSCI’s index extended its losses after the flash HSBC Purchasing Managers’ Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October.

Japan’s benchmark Nikkei share average showed some very choppy moves. The Nikkei was last up 0.2 percent on the day .N225 after rising 2 percent earlier and hitting a 5-1/2 year high.

“The focus today is that the yen pushed to 103 last night on the back of comments out of the U.S.,” said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo.

The dollar held steady against the yen at 103.12 yen, having hit a high of 103.74 yen on Wednesday, the greenback’s strongest level versus the Japanese currency since October 2008.

Highlighting its broad strength in the wake of Bernanke’s comments, the dollar hit a near three-year high against a basket of currencies at 84.498 .DXY and touched an 11-month high versus the Australian dollar.

The weak HSBC flash PMI for China added to pressure on the Australian dollar, which fell to its lowest level since June 2012 at $0.9626.

“The Aussie fall was in reaction to Bernanke’s testimony and it will go on for a while longer,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney.

“I see a drop below $0.9600 but with good support at $0.9581. If the U.S. bond markets continue to sell off, then the Aussie could test 90 cents,” he added.

In commodities markets, Brent crude slid 0.6 percent to $102.02 a barrel, while gold eased 0.1 percent to $1,367.81 an ounce.

(Additional reporting by Hideyuki Sano and Dominic Lau in Tokyo, Cecile Lefort in Sydney; Editing by Eric Meijer)

The 10-year yield stood near a one-year high hit a week ago
and the market is seen as vulnerable as the BOJ’s massive easing
keeps pushing Japanese share prices higher and weakening the
yen.

“Hardly any investors expected the yen’s fall and a rally in
shares of this magnitude. Everyone got it wrong so far. So some
investors are starting to think that Japan’s growth could be
much higher than they had thought, if this continues,” said
Tohru Yamamoto, chief fixed income strategist at Daiwa
Securities.

The yield on the 10-year cash bonds stood unchanged at 0.880
percent, not far from the one-year high of 0.920
percent last Wednesday.

Although JGBs had tracked gains in U.S. bonds in early trade
following dovish comments from Federal Reserve officials, those
quickly evaporated after the BOJ’s decision.

While few market players had expected new policy actions at
the BOJ’s two-day policy meeting ending on Wednesday, a small
number of players had hoped the it could introduce a new funding
programme, such as a two-year liquidity offer.

The 10-year JGB futures fell as low as 141.60 at
one point but managed to end almost flat at 141.90.

“The market is so thin that it has become easier to make
speculative selling,” said Takafumi Yamawaki, chief rates
strategist at JPMorgan Chase. “The BOJ doesn’t seem to intend to
forcefully rein in a rise in bond yields by any means.”

Longer maturities fared worse, with the 30-year yield
hitting a fresh three-month high of 1.885 percent
, up 4.0 basis points on the day.

NO CONSENSUS

Japanese government bonds have been going through a rough
ride after the BOJ stunned investors on April 4 with its
unprecedented monetary easing.

Although the BOJ has sharply increased bond buying, pledging
to double its bond holdings in two years, subsequent sharp gains
in Japanese shares and the fall in the yen have investors
rethinking the benefit of investing in JGBs.

Japanese share prices rose 1.6 percent on Wednesday
to hit a 5 1/2-year high on Wednesday while the yen
stayed near 4 1/2-year low of 103.32 per dollar.

For a long time, Japanese bond investors basked in a
combination of slow economic growth and low or sub-zero
inflation. But the unprecedented scale of the BOJ stimulus
raised fears the status quo may be finally broken.

“There are no longer consensus in the market on what the
economy will be like two years from now,” said Daiwa’s Yamamoto.

For now, the market is keenly focused on what Governor
Haruhiko Kuroda would say at a press conference about the recent
rise in bond yields. The BOJ said last month that its stimulus
was aimed at bringing down the yield curve – and the opposite
has happened since then.

“JGBs’ reaction is not in line with the BOJ’s expectations.
If Kuroda was to say that rises in bond yields are natural when
the economic outlook is improving – even though that is clearly
not in sync with the BOJ’s original view – those who have long
JGBs positions will be upset and sell,” said a trader at a major
Japanese bank.

In addition to Kuroda, investors are also looking to comments
by U.S. Federal Reserve Chairman Ben Bernanke, who will testify
about the economy before a congressional panel at 1400 GMT
Wednesday.

Expectations that the Fed mighty be leaning towards tapering
off its bond buying programme were dented by comments from two
Fed officials on Tuesday.

The 30-year bond yield hit a fresh three-month high while
the 10-year yield edged near a one-year peak hit last week as
market players gird themselves for the outcome of the BOJ’s
two-day policy meeting which ends on Wednesday.

“There was an opinion that the recent rise in yields should
attract investors but the auction result showed that wasn’t
simply the case,” said Akito Fukunaga, chief rates strategist at
RBS.

The auction of 400 billion yen ($3.9 billion) of 40-year
JGBs, the longest maturity currently on offer, produced a high
yield of 1.955 percent, a bit above market expectations. Bids
were just 2.64 times the offer, the lowest since August 2011.

The yield on the current 10-year cash bonds rose 3.0 basis
points to 0.875 percent, not far from a one-year
high of 0.920 percent last Wednesday.

The 30-year bond yield rose 2.5 basis points to 1.845
percent, climbing as high as 1.865 percent at one
stage, its highest level since late February.

JGBs have been trapped in its worst bear market since 2008
after aggressive stimulus the BOJ started in April unsettled
investor confidence that inflation would be kept low.

As of Monday this week, the Nomura Bond index, a
widely used bond index, fell 2.9 percent since April 4 — when
the BOJ unveiled an unprecedented plan to almost double its
balance sheet in two years — the biggest fall since March-June
2008.

Although the BOJ has boosted bond purchases to achieve this,
that impact was dwarfed by a surge in stocks and fall in the
yen, which prompted some investors to shift funds out of bonds.

BOJ Governor Haruhiko Kuroda did little to soothe bond
investors on Monday, when he said it was natural for long-term
bond yields to rise as inflation expectations pick up.

Many market players expect Kuroda to repeat a similar
message on Wednesday, when he concludes a two-day policy
meeting, which could push yields further.

Fukunaga at RBS said the 10-year yield could hit 1.0
percent.

“If the 10-year yield hits one percent, though, my guess is
share prices will be negatively affected. Bank shares and Reits
(real estate investment trusts) already seem to have high
correlation with bond prices. So I suspect the yield will peak
around that level,” he said.

In addition to the BOJ, some market players are wary U.S.
bond yields could jump if Federal Reserve Chairman Ben Bernanke
signals he is ready to taper the Fed’s bond buying at his
congressional testimony on Wednesday.

In the futures market, the 10-year JGB futures price fell
0.23 point to 141.89.

Currency markets took their cue from comments by John
Williams, the president of the Federal Reserve Bank of San
Francisco, who said the Fed could completely exit its easing by
the end of the year. Investors see Williams’ thinking as close
to that of the Fed’s top officials such as Chairman Ben Bernanke
and Vice Chair Janet Yellen.

“At the previous policy meeting, the Fed essentially said
whether it will reduce or expand its bond buying is 50-50. But
markets are now suspicious that Bernanke may signal it’s
something like 55-45 when he testifies in the congress on May
22,” said Minori Uchida, chief FX analyst at the Bank of
Tokyo-Mitsubishi UFJ.

The dollar index , which measures the
currency’s value against a basket of six major currencies,
gained 0.4 percent to 83.886, nearing a 10-month high of 84.094
set on Wednesday.

A break of its July peak of 84.100 could open the way for a
test of 84.929, a 76.4 percent retracement of its fall from the
2010 peak of 88.708 to near a three-year low of 72.696 hit in
2011.

But Mitsubishi’s Uchida said barring further evidence the
Fed is moving towards scaling back stimulus, the dollar index
could peak out around the current level.

“U.S. bond prices gained sharply yesterday despite William’s
comments. Each market has its own interpretation now and there’s
no broad consensus on the Fed’s stance yet,” he said.

Speculation about the Fed’s possible exit from stimulus is
having the most pronounced impact on the Australian dollar,
which has enjoyed the status of highest-yielding major currency
for years.

Having already lost 2.1 percent on the week by late U.S.
levels, the Aussie skidded further on Friday, shedding
0.6 percent to $0.9763 to an 11-month low. If it closes below
$0.9871, it would mark its first weekly close below its 200-week
average since July 2009.

The currency’s 5.7 percent tumble this month accounts for
nearly all of its 6 percent loss on the year, as a fall in
commodity prices in recent months raises concerns about a
slowdown in China, the biggest buyer of Australia’s natural
resources.

“I can’t see it falling beyond its low of 0.96 from last
June, as it’s not in bad enough shape to justify that… but for
now the lack of an explosive bounce in the Chinese economy,
against a stronger recovery in the U.S. has shifted attention to
USD,” said Soichiro Tsutsumi, vice president of trading at
eWarrant Japan Securities.

VOLATILITY

Implied volatilities on the Aussie have shot up in the past
few days, with one-month volatility near an eight-month high
, suggesting investors are expecting mercurial trade
ahead.

“We’ve been seeing some Japanese selling in the kiwi and the
Aussie, and we see some profit taking on yen crosses,” said Tim
Kelleher, head of institutional FX sales at ASB.

Against the yen, the Australian dollar lost 0.4
percent to 99.86, its lowest since May 2. The New Zealand dollar
sagged in sympathy, dropping 0.4 percent to 83.07 yen
. Against the greenback, it dropped 0.6 percent to
$0.8124, its lowest in six months.

Despite its strength against the Antipodean currencies, the
yen gave up 0.1 percent against the dollar, which fetched 102.30
yen, not far from Wednesday’s 4-1/2-year high of 102.77
yen.

Patchy U.S. data is still blunting the dollar’s gains, with
Thursday a case in point. Factory activity in the U.S.
mid-Atlantic region contracted in May as new orders fell to
their lowest level in almost a year, while new claims for
jobless benefits spiked.

The next block of resistance lies around 103 yen, analysts
say.

“Exporters now have a lot of stops around 103, so although
it’s close it actually seems quite far away,” said Kenichi
Asada, manager of FX at Trust & Custody Services Bank.

“But like the 100 level, which a lot of people said it
wouldn’t reach due to the stops around 99.5, it might break
through- possibly if there is something more concrete about the
end of QE in the FOMC minutes released next week.”

A resurgent dollar pushed the euro near a six-week low.

The common currency stood at $1.2865, near a six-week
low of $1.2843 touched on Wednesday.