Hong Kong: Equities fell Friday following a sell-off on Wall Street where forecast-beating data revived concerns the Federal Reserve could hike interest rates further, while speculation swirled that the Bank of Japan could be preparing to shift from its era of easy money.
Traders have enjoyed a broadly positive week on hopes central banks were at or close to the end of more than a year of monetary tightening as inflation comes down and figures suggest the US economy is holding up.
The Fed said Wednesday that future rate decisions would be determined by data, which was welcomed by investors who saw recent indicators – pointing to an easing of price pressure and softening of the labour market – as giving it room to hold off more increases.
And on Thursday, European Central Bank boss Christine Lagarde left open the possibility of a pause.
However, news that US growth beat expectations in the second quarter while jobless claims slipped revived the possibility that there was still more work to do.
Adding to the unease was a report that the Bank of Japan was looking at tightening its monetary policy by loosening its grip on government bond yields, a process known as yield curve control.
That has fanned fears that Japanese investors – the biggest foreign owners of US Treasuries while also having vast holdings across the globe – could move their cash back home owing to the temptation of better returns.
The talk comes as inflation in the country continues to rise.
The prospect of more money flowing back into Japan sent the yen up against the dollar and euro, while stocks dropped.
And Asian markets sank in morning trade Friday.
Tokyo shed more than one percent, while Hong Kong, Shanghai, Sydney, Seoul, Wellington, Manila and Jakarta were also off.
Stephen Innes, of SPI Asset Management, said: "It's worth noting that Japanese investors have already sold a significant amount of foreign fixed income and have cash in dollars and foreign currencies that are waiting to be invested.
"This means that Japanese investors are currently underweight in Japanese government bonds and yen. As a result, there is a high possibility of a significant flow of funds being repatriated back into yen and invested in fixed income."
A decision late last year by the BoJ to widen the band within which it allows bonds to move sent shudders through markets and sent the yen soaring.
Shaun Osborne, chief foreign-exchange strategist at Scotiabank, added: "While speculation of a policy tweak has been wrong before – and reports suggest only that the BoJ will 'discuss' a YCC tweak – rising inflation, rising wages and the sheer scale of BoJ purchases suggests that the time for some adjustment is coming."