HONG KONG (Reuters) - Japanese stocks and the yen were down in a volatile session for Asian markets on Wednesday as investors nervously waited on the outcome of the Bank of Japan's policy meeting.
While the BOJ is expected to make negative interest rates the centrepiece of a new policy framework, analysts are divided on what new measures it will unveil even as it grapples with concerns that it is reaching the limits of its unconventional policy making.
Ahead of the decision, MSCI's broadest index of Asia-Pacific shares outside Japan was flat, perched at its highest levels since Sept. 12. Markets in Hong Kong and Japan led early losers. Tokyo's Nikkei was off 0.5 percent.
Volatility was especially acute in the yen with the currency trading 0.13 percent weaker against the dollar ahead of the decision.
"The greatest risk for the BOJ is a failure to reach a consensus decision that will meet the raised inflationary expectations of the market and as a result we are short dollar/yen going into the meeting," said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong.
With three years of massive money printing failing to push up inflation, the BOJ is expected to move away from the shock therapy of massive stimulus towards a more protracted battle against deflation, say sources familiar with its thinking.
Spreads between 20 year and 2 year Japanese debt have steadily narrowed in recent years and collapsed to its lowest levels on record in late July before widening slightly to 64 basis points.
Wary of a flattening yield curve that risks impairing financial intermediation, the BOJ could also seek ways to steepen the curve such as making its bond buying more flexible
Markets are also watching out for the U.S. Federal Reserve policy decision, due later in the global day. Both hawkish and dovish comments from Fed officials recently have stoked volatility in financial markets, although consensus is now centred on a U.S. rate hike by year-end.
While expectations of further action from the BOJ has increased after it promised a "comprehensive assessment" of its policy settings and as the economy has slipped back into deflation, some are expecting no change to existing policy.
"Bolder, more aggressive, action is needed to put a top in the yen and a bottom in USD/JPY but the chance of that happening is slim and we believe that at the end of the BOJ meeting, investors will be disappointed," Kathy Lien, managing director at BK Asset Management, said in a note.
U.S. stocks ended little changed, with healthcare gains offsetting declines in energy
The Dow Jones industrial average added 0.05 percent, the S&P 500 gained 0.03 percent, and the Nasdaq Composite rose 0.12 percent.
In bond markets, U.S. Treasury yields were supported in early trade as investors bought longer-dated bonds on uncertainty over the outcome of the BOJ meeting.
Benchmark 10-year Treasury notes were trading at 1.69 percent, a shade higher from Tuesday's level. Japanese and Australian government bond yields crept lower as investors flocked to safe-havens before the decision.
Currency markets held tight in recent trading ranges with a broad dollar index, a basket of trade-weighted currencies, holding steady at 95.97. The euro was steady at $1.11530, while the dollar weakened slightly against the yen at 101.57 yen.
The Australian dollar consolidated chunky recent gains at $0.7552 as the demand outlook for industrial metals for China continued to improve along with favourable tailwinds from emerging markets and currencies. It is up 1.5 percent in a week.
Oil prices were up in early Asian trade with U.S. crude oil futures up 1.8 percent to $44.83 per barrel.