GLOBAL MARKETS-Yen soars, Nikkei slides as rate hikes loom over Japan

By Tom Westbrook

SINGAPORE, Dec 8 (Reuters) – Japanese markets were reeling on Friday, with the Nikkei heading for its biggest weekly drop since October, bonds battered and the yen surging toward its largest weekly gain for five months as investors rushed out of bets on Japanese rates staying low.

Beyond Japan MSCI’s broadest index of Asia-Pacific shares ex Japan rose 0.5% and Treasuries sold slightly. The Nikkei was down 1.6% for a weekly drop of 3.3%.

Other moves were more modest as traders wait on U.S. labor data due later in the day.

The yen leapt more than 2% on Thursday and was well supported on Friday, though kept below an overnight four-month peak of 141.6 per dollar to trade at 143.39.

Bank of Japan Governor Kazuo Ueda told parliament on Thursday the central bank faces an “even more challenging” year ahead before discussing options for exiting its ultra-easy settings, which traders took as a sign of change in the offing.

The BOJ is due to set policy rates on Dec. 19.

“This may prove to be too soon for large steps to be unveiled, but… we believe it is a matter of when, not if, the BOJ jettisons its negative interest rate regime,” said Corpay currency strategist Peter Dragicevich.

“This eventual turn and the capital flow implications… underpins our forecasts looking for the ‘undervalued’ yen to strengthen over the next year. This is also one of the pillars behind our outlook for the dollar to weaken.”

Japan’s bond market remained under heavy pressure, with the 10-year government bond yield up almost 15 basis points in two sessions to 0.79%, although still well below the BOJ’s soft cap of 1%.

Five-year bonds, which suffered their sharpest single-day selloff in a decade on Thursday, with the yield up 10.5 bps, rose another 3.5 bps to 0.375% on Friday. Yields rise when bond prices fall.

Data showing Japan’s economy fell faster than first estimated in the third quarter, as the household sector faced growing headwinds, complicates the central bank’s outlook.

U.S. jobless claims met expectations, leaving the focus on whether Friday’s broader payrolls figures will reflect growing signs that the job market is slowing.

Overnight the Nasdaq finished 1.4% higher after a 5.3% jump for Google parent Alphabet as markets cheered the launch of its newest AI model.

Shares in Australian gas producer Santos were last up 6% on news it was in talks with larger rival Woodside about a merger. Woodside shares fell 1%.

In currency trade the yen’s surge has the dollar index eyeing a slim weekly loss at 103.59. The euro was lower for the week at $1.0785.

The Australian dollar, weighed by a slowing economy and traders’ perception that the central bank is turning dovish, was set to snap a three-week winning streak with a 1% drop this week to $0.6607.

Brent crude futures touched a five-month low overnight, before recovering slightly to $75.02 a barrel in Asia trade. Oil is set for a 5% fall this week.

Gold, having touched a record high early in the week before recoiling, was clinging on at $2,032 an ounce. Bitcoin is eying an eighth consecutive weekly gain on expectations that U.S. interest rates have peaked and anticipation that a bitcoin ETF might be approved.

It last bought $43,484.