Asian Markets Extend Rally as Yen Strengthens with Bank of Japan Holding Steady

Asian markets climbed higher on September 20, following the U.S. interest rate cut, while the yen strengthened after the Bank of Japan upheld its monetary policy. The MSCI Asia-Pacific index rose 0.6%, driven by Wall Street’s momentum, as investors assess the global economic outlook.

Asian Markets Surge as U.S. Rate Cuts Drive Gains, Yen Strengthens with Bank of Japan’s Steady Policy

On September 20, Asian equities continued their upward trajectory after the United States cut an outsized interest rate. Conversely, the yen gained ground as the Bank of Japan maintained its stance on rates and a positive outlook on the economy.

However, the European share markets are expected to open at a lower level, as the EURO STOXX 50 futures and FTSE futures are expected to decline by 0.3% and 0.5%, respectively. Wall Street futures were marginally lower after the S&P 500 surged to a record close on September 19.

The central bank maintained its benchmark lending rates in China despite anticipating a decrease. Blue chips experienced a 0.5% decline, while Chinese equities were an outlier in the region. State banks intervened to prevent the onshore yuan from appreciating too rapidly, as it reached its most significant level in nearly 16 months.

MSCI's broadest index of Asia-Pacific equities outside Japan increased by 0.6% to its highest level in two months, mirroring Wall Street's overnight gains. The index was anticipated to gain 2.4% weekly.

The Nikkei gained 1.5% and increased by 3.1% for the week.

Bank of Japan Holds Rates Steady as Yen Strengthens, Focus Shifts to Inflation and Future Policy Adjustments

The Bank of Japan maintained its short-term rate at 0.25% in a brief statement on Friday, as was widely anticipated. However, it revised its assessment of consumption. It is important to note that the exchange rate was more likely to impact prices than in the past.

According to Reuters, the yen has increased 14% from its low in early July; however, it has encountered some resistance at the critical 140 per dollar level. It lasted up 0.3% at 142.21 per dollar but remained down 1% on the week despite the general decline in the dollar's value.

As the data released on Friday indicated, Japan's core inflation increased for the fourth consecutive month. This reinforces the necessity for additional policy tightening.

"The yen has become stronger and the market has not completely settled down, so I think it is appropriate to leave rates unchanged for now," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

"The need for hikes as a measure to counter the weak yen has somewhat decreased. Rather, the BOJ will look at wages and prices and make adjustments in a way that will maintain a virtuous cycle of wages and prices."

Investors will now concentrate on Governor Kazuo Ueda's indications regarding the timing and tempo of future hikes during the press conference following the meeting at 0630 GMT.

Wall Street eventually had the opportunity overnight to process the Federal Reserve's initial rate reduction. Investors are betting on continuing U.S. economic expansion, and the better-than-expected unemployment claims data further reinforced the labor market's resilience.

Markets Anticipate Further Federal Reserve Rate Cuts as Dollar Hits One-Year Low, Commodities Gain

The markets suggest a 40% likelihood that the Federal Reserve will reduce rates by an additional 50 basis points in November and have 73 basis points priced in by the end of the year. Rates are anticipated to reach 2.85% by the conclusion of 2025, which is currently considered the Federal Reserve's neutral estimate.

The dollar was at or near one-year lows in foreign exchange markets about significant currencies. The British pound was at $1.3297, its highest level since March 2022, after a 0.7% increase overnight as the Bank of England maintained its interest rate.

Short-dated U.S. Treasuries maintained levels that were nearly two years higher. The two-year Treasury yields decreased by 3 basis points to 3.57% on Friday but were up three basis points for the week.

Additionally, commodities maintained their weekly gains. The price of gold was hovering near a record high of $2,592.67 per ounce, and energy prices are expected to increase for the second consecutive week.

Brent futures dropped 0.3% to $74.67 per barrel; however, they have increased by 4.2% this week.