The yen extended its rally against the dollar Wednesday ahead of a much-anticipated Bank of Japan announcement, with debate centred on whether it will hike interest rates, while equities mostly rose on growing hopes for a cut in US borrowing costs.
With the two biggest economic events of the week looming, traders were jockeying for position as authorities in Tokyo play their cards close to their chest, with comments from Japan's new top forex chief suggesting an increase could be on the cards.
Bets on a second lift since March -- which was the first in 17 years -- have surged in recent days, pushing the yen to 152.12 per dollar and putting the currency on course for its best month in a year and a half, according to Bloomberg data.
That is just weeks after the unit hit a nearly four-decade low close to 162 at the start of July. Higher rates push up government yields, making assets more attractive to anyone looking for better returns.
After more than a decade of pursuing an ultra-loose monetary policy to kickstart the stuttering economy and flatlining inflation, the BoJ has this year shifted its focus as prices continue to rise at rates above the bank's target.
However, officials have had to tread a fine line as the economy remains fragile.
Many commentators had predicted the bank would stand pat this month, but Japan's newly appointed top foreign exchange official said the benefits of a weaker yen were outweighed by the demerits.
"While the recent depreciation of the yen has both advantages and disadvantages, the demerits are becoming more noticeable," Atsushi Mimura told Bloomberg in an interview Monday, pointing to higher energy and food prices as well as the effect on importers.
There is concern about the impact a hike could have on economic growth, with Stefan Angrick at Moody's Analytics warning that at best a small increase will be an added drag, and at worst "it would tip the economy into recession and precipitate broader financial market disruptions".
However, Hiroshi Namioka at T&D Asset Management was less concerned, saying he thought BoJ boss Kazuo Ueda "wants to expand the scope for lowering policy rates for the future.
"It's my view that, even if the policy interest rate is raised, the impact on the real economy, such as consumption and capital investment, will be limited. In fact, unless the policy interest rate is raised, inflation may not slow down in the future due to a rise in import prices.
"My view is that consumption is not growing because inflation has not slowed down and real wages are stagnant. Some politicians are also becoming aware of this issue.
He also raised the fact that the Fed's September meeting in September would come before the BoJ, which could make it harder to lift then.
"The timing of this (July) interest rate hike is probably appropriate," he said.
The prospect of higher borrowing costs weighed on the Nikkei, though the rest of Asia advanced, with optimism running high that while the Fed will not cut rates later in the day, it is now in dovish mode and will tee up a reduction at its next gathering.
There is also talk of at least one more before the end of the year.
Hong Kong, Shanghai, Sydney, Seoul, Singapore, Wellington, Manila and Jakarta all advanced as dealers brushed off news that Microsoft saw an increase in quarterly profit but its key cloud computing unit fell short.
That came after results last week from Tesla and Alphabet missed forecasts, fuelling concerns about the titan tech firms that have led a rally in markets this year.
More reports are due this week from fellow market heavyweights Apple, Amazon and Facebook-parent Meta.
Tokyo - Nikkei 225: DOWN 0.4 percent at 38,369.54 (break)
Hong Kong - Hang Seng Index: UP 1.4 percent at 17,232.50
Shanghai - Composite: UP 0.9 percent at 2,905.94
Dollar/yen: DOWN at 152.32 yen from 153.09 yen on Tuesday
Pound/dollar: UP at $1.2842 from $1.2832
Euro/dollar: UP at $1.0821 from $1.0813
Euro/pound: UP at 84.27 pence from 84.24 pence
West Texas Intermediate: UP 0.8 percent at $75.33 per barrel
Brent North Sea Crude: UP 0.5 percent at $79.02 per barrel
New York - Dow: UP 0.5 percent at 40,743.33 (close)
London - FTSE 100: DOWN 0.1 percent at 8,285.01 (close)
