Passersby walk past electric monitors displaying Japan's Nikkei share average and the exchange rate between the Japanese yen and the U.S. dollar in Tokyo.
The broadest index of Asia-Pacific shares outside Japan rose by 0.8% to hit a new seven-month high and was headed for a third consecutive week of gains.
Japan's Nikkei fell by 0.4% and the yen climbed 2.7% against the dollar overnight, rising 0.2% further to 128.65 per dollar. It is up 6% in less than three weeks since the Bank of Japan stunned markets by widening the band around its 10 year bond yield target.
A newspaper report that flagged the possibility of more flexibility has redoubled bets on a coming shift out of ultra-easy policy that seeks to pin yields near zero.
On Friday morning, the yield on 10 year Japanese government bonds breached its new cap of 0.5%, which was 0.53%. The BOJ was making unscheduled bond purchases in response. The market is expecting that they will increase the band for the next 10 years, said Naka Matsuzawa, chief Japan macro strategist at Nomura, referring to the central bank's upcoming meeting on 17 -- 18 January.
He said that it's too early for the BOJ to give up. It still has ammunition to defend the 0.5% yield cap. The BOJ had described its December move as a way to address distortions in the bond market and defended the new target with bond purchases, but that is under immense pressure now as traders have a sniff of a shift at the next week's meeting.
Jane Foley, a strategist for Rabobank FX, said that there wouldn't be a change in policy this month. We would look to buy the yen against the dollar on the back of dips in anticipation of another policy move in the spring. Sources familiar with the bank's thinking told Reuters that the BOJ will likely raise its inflation forecasts next week and debate whether further steps are needed.
Market sentiment was dominated by overnight U.S. December inflation data that landed more or less on consensus expectations, which was dominated by overnight U.S. inflation data. The headline consumer price increase was slowed to 6.5% in December from 7.1% in November.
The investor's expectation for U.S. interest rates was down-shifting. Futures markets have priced in several rate cuts this year due to the Federal Reserve hike of 25 basis points rather than 50 basis points.
The dollar fell broadly, U.S. treasuries rallied and assets seen as risky, such as stocks andcryptocurrencies.
The Nasdaq hit a one-month high. The U.S. dollar fell 0.9% to a nine-month low of $1.0868 per euro and the risk-sensitive Australian dollar rose to a roughly five-month high of $0.6984.
It went up 5% to break above $19,000. But analysts cautioned that services inflation remains sticky, and that Fed policymakers are talking only of a slowdown in hikes in the nearing, not a pivot to cuts.
The market relief is grounded on solid evidence of dis-inflation squaring with the Fed approaching the end of its tightening cycle, said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.
Markets may be too optimistic about the pivot'', despite the layers of inflation. Oil extended gains overnight - helped by optimism about China's reopening - and Brent crude futures were broadly stable at $83.82 in Asia morning trade. The central bank of South Korea raised its policy interest rate by 25 basis points on Friday, as expected, and economists think it might have reached the end of its hiking cycle.