Marketmind: Japan hesitates

A look at the day ahead in U.S. and global markets from Mike Dolan.

Judging by Wednesday’s reaction, world markets reckon Japan will eventually abandon its ultra-loose monetary policy despite a stubborn doubling down this week – and overseas ructions may be less than feared.

After weeks of speculation, the Bank of Japan left its rock-bottom interest rates unchanged on Wednesday and kept its government bond yield cap at 0.5%, defying expectations it would phase out the stimulus programme as inflation builds.

But after some wild gyrations on the initial announcement, the market reaction was rather muted on balance.

The yen lunged lower to begin with, but then quickly rebounded. Dollar/yen settled back below 130 – roughly where it closed last Thursday – and remains down 1.2% for the year so far and down almost 15% since October.

Japan’s Nikkei ended 2.5% higher, but it closed before the yen rebound in European hours.

Japan’s 10-year government bond yield crept back towards the 0.5% cap after an initial drop – indicating how the BOJ will likely have to continue buying hundreds of billions of dollars of bonds to retain the cap and how that is seen as unsustainable over time.

Investors now train their eyes on the exit of BOJ governor Haruhiko Kuroda in April as the point for a comprehensive shift.

Overseas fallout was even more subdued, with European stocks and Wall St futures little changed and U.S. Treasury yields hovering around 3.50%, where they’ve been for the past week.

Pressure on the dollar continues more broadly as attention turns back to the health of the U.S. economy, Federal Reserve speculation and the unfolding earnings season.

The release of December U.S. producer price, retail sales and industrial production numbers later on Wednesday now takes centre stage. A host of Fed speakers are also on the slate.

In corporate earnings, diverging fortunes within the investment banking world dominated on Tuesday.

Wall Street titans split as Morgan Stanley’s stock surged on higher wealth management revenue while Goldman Sachs skidded lower as results revealed higher costs and an increase in rainy day funds.

Elsewhere, Microsoft plans to cut thousands of jobs with some roles expected to be eliminated in human resources and engineering divisions, according to media reports.

Walt Disney defended its decision to deny Nelson Peltz a board seat, saying the activist investor “lacked the skills and experience” to help the media and entertainment giant.

Key developments that may provide direction to U.S. markets later on Wednesday:

* U.S. Dec producer price inflation, retail sales, industrial production, Jan NAHB housing market indicator, Nov business/retail inventories, Nov Treasury data on overseas holdings. Fed releases Beige Book on economic conditions. U.S. Treasury auctions 20-year bonds

* Bank of Japan policy decision. World Economic Forum in Davos, Switzerland.

* Kansas City Federal Reserve President Esther George, Atlanta Fed President Raphael Bostic, St Louis Fed chief James Bullard, Dallas Fed chief Lorrie Logan, Philadelphia Fed chief Patrick Harker all speak

* U.S. corporate earnings: Alcoa, Charles Schwab, Discover, Kinder Morgan, Prologis, PNC, JB Hunt

(By Mike Dolan, editing by Raissa Kasolowsky mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)