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Hong Kong - The yen drifted higher on Thursday, though the threat of Japan selling more of its currency loomed, while Asian stocks slipped from a near five-month high.
Japan's solo intervention to weaken the yen on Wednesday arrived sooner than many market participants had expected, making investors suspect officials in other Asian economies may keep their currencies weak and pushing up longer-term US Treasury yields.
"After Japan joined the club of Asian central banks by intervening in the FX market, investors will now look to determine how successful the policy will turn out be," Mitul Kotecha, global head of foreign strategy at Credit Agricole CIB, said in a note.
"In the near term there will be wariness of further intervention to push the yen weaker, which will also keep other Asian currencies on the back foot."
Asia's currencies are a major focus among investors globally, especially with the Chinese government setting the yuan's mid-point for its trading range at a post-revaluation high for the fifth day in a row.
Beijing is under fire from Washington, where lawmakers have threatened to take action against China's currency practices. US Treasury Secretary Timothy Geithner will tell policymakers later in the day that he is looking for ways to get Beijing to move faster on the yuan, his prepared remarks to Congress showed.
All eyes were on the US dollar dripping lower against the yen. Japan did not appear to step in to currency markets during Asian trading hours, leaving what one trader called a "deafening silence".
JAPAN'S RESOLVE
The US dollar was down 0.5% at ¥85.30, not too far from Wednesday's high of around ¥85.75. Dealers on Thursday may further test Japan's resolve to keep the yen weak, though portfolio managers with a longer time horizon could hold off on closing out of bets on yen weakness.
"Institutional investors have started to close their yen-short/dollar-long positions since mid-August, which I think has helped to accelerate the yen's rise. Intervention could make those investors think twice about closing their positions," Kimihiko Tomita, the head of forex at State Street Global Markets in Tokyo, said.
The yen was climbing the most against other currencies. The Australian dollar, for example, rose 0.9% to ¥79.74.
Still, expectations that Japan is determined to make its yen selling policy effective made Japanese exporter stocks outperform most of Asia.
Japan's Nikkei share average was largely unchanged after earlier climbing to the highest since August 10. Large and liquid exporter stocks outperformed the broad market, with Toyota Motor Corp up 2.2%.
Despite the Nikkei's stand-out equity gains this week, Japan has significantly underperformed other advanced stock markets in the current quarter. US and European stocks are up some 9% while Japan has eked out a gain of 1.3%.
The MSCI index of Asia Pacific stocks outside Japan slipped 0.6% on profit taking in the materials sector. Commodity-related stocks have been outperforming the MSCI index, climbing 20% since June compared with the index's returns of 16%.
Investors will be looking to reports on new US jobless claims, producer prices and a regional manufacturing report later in the day. Recent data has suggested the US economy is stuck in a soft patch but do not suggest a new recession is brewing, as some analysts had feared.
Investors took advantage of the overnight rise in the late-maturity US Treasury yields and bought the bonds back. The 10-year US Treasury yield slipped two basis points from late Wednesday in New York to 2.70%.
Japan's yen selling had weighed on long-maturity US yields on Wednesday in anticipation that the purchased dollars would presumably be recycled into short-maturity Treasuries.
The spread of 10-year Treasury yields over Japanese bond yields widened to the most in almost a month, offering another reason for dealers to get behind dollar strength against the yen.
