Asian shares hit 2013 lows

Tokyo  - The U.S. dollar fell against the yen and Japanese stocks sagged after the Bank of Japan held off from taking fresh steps to curb bond market volatility, while Asian shares hit 2013 lows amid worries over slowing growth in China and continued uncertainty on how long the US stimulus will remain in place.

European stock markets are likely to follow suit, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX will open down 0.4%. A 0.1% drop in U.S. stock futures also pointed to a cautious Wall Street start.

The Bank of Japan (BoJ) kept monetary policy steady and refrained from taking new measures to calm bond market turbulence, possibly judging that the recent market turbulence has yet to pose severe damage to the economy's recovery prospects.

The BoJ's unprecedented bond-buying programme launched in April triggered sharp swings in the Japanese government bond market and led to a spike in yields. The Nikkei stock average has also come under heavy selling since May 23 and slumped from 5-1/2-year highs while the dollar had briefly lost all gains made on the yen since the April 4 announcement.

The decision disappointed some market players who had expected fresh steps from the BoJ in response to the elevated market volatility, sending the Nikkei skidding 1.5% at the close and the dollar 0.6% lower to ¥98.18.

"The 'zero' response could be taken as the BoJ allowing the market volatility to continue, and highlights its insensitivity to market sentiment and price actions. This is very regrettable especially since the policy the BoJ is taking is significant and appropriate," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.

MSCI's broadest index of Asia-Pacific shares outside Japan tumbled 1.1% to a fresh 6-1/2-month low for a fifth straight day of declines, which would mark its longest losing streak in nearly three months.

The Indian rupee hit a record low, with the absence of central bank intervention prompting importers to rush to cover future dollar needs, while traders also cited the drop in other Asian currencies as hurting sentiment..

Fed stimulus concerns

Solid US jobs data and the Standard & Poor's raising the rating outlook of the US to stable from negative on the back of an improved economy kept alive speculation about an eventual softening of the Fed's strong commitment to quantitative easing even as few saw any imminent policy shift.

Global equity and commodity markets have been jolted recently by the Fed stimulus concerns, slowing growth in China, a deep slump in Europe and wild swings in Japanese stocks, bonds and the yen.

Hong Kong shares tested a seven-month low, with local developers and Chinese cyclical names leading index losses as investors took risk off the table ahead of a holiday on Wednesday. Chinese markets are closed from Monday to Wednesday.

"People are cutting risk ahead of the holiday and unsure about how mainland markets will react when they reopen on Thursday after the soft data over the weekend," said Kelvin Wong, Julius Baer's China and Hong Kong equities analyst.

Australian shares bucked the trend to rise 0.4%, while South Korean shares fell 0.6%.

Analysts said the jitters over the Fed's outlook underscores some of the drawbacks of the quantitative easing policy.

"It shows the cost of the QE policy, which boosts liquidity and exacerbates moves in financial markets, while having a very slow follow through in the real economy," said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.

Before the recent setback, Japanese equities enjoyed a record-breaking rally and the yen tumbled to multi-year lows against the dollar on the back of Prime Minister Shinzo Abe's sweeping growth-spurring measures.

Even after this session's pullback, market players largely maintain their view for the dollar's longer-term uptrend.

The dollar reached a high of ¥99.29 overnight after the S&P's rating move reduced the risk of the world's biggest economy losing its AA-plus rating. Last month, the US currency hit a 4-1/2-year peak of 103.74 against the yen, underpinned by the BoJ's massive stimulus.

"We are USD-bullish due to the ongoing Fed tapering debate which has steepened the US yield curve ... Long-term capital flows are now directed towards US corporates, which is US dollar-positive," Morgan Stanley said in a research note.

Worries about slackening demand from the world's leading consumer China have weighed on the commodity-sensitive Australian dollar, which fell to a 20-month low of $0.9393 on Monday. The Aussie was at $0.9404 on Tuesday.

US crude futures eased 0.2% to $95.63 a barrel and Brent fell 0.3% to $103.65.

Spot gold was down 0.2% at $1 383.56 an ounce, as the S&P's move on the US credit outlook hurt bullion's safe-haven appeal.