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Yen gains as Asian stocks diverge before BOJ; oil extends slump

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The yen climbed with gold and government debt, while stocks in Tokyo retreated amid jittery trade ahead of the Bank of Japan's much-anticipated policy review.

[WELLINGTON] The yen climbed with gold and government debt, while stocks in Tokyo retreated amid jittery trade ahead of the Bank of Japan's much-anticipated policy review. Oil headed for its third weekly decline in a month.

After jumping as much as 1.8 per cent early Friday, the yen maintained an advance of about 0.8 per cent, even after data showed core consumer prices fell more than economists had expected.

Stocks in Japan fell a second session, while those in Australia and South Korea climbed amid the countdown to the BOJ's statement. US crude extended losses into a seventh day, trading at a three-month low amid angst over rising supplies. Gold headed for its first weekly gain in three weeks as Australian bond yields sank to a record low.

Currencies from the yen to the pound have been whipsawed this week amid speculation over stimulus moves from central banks. Traders will get more intelligence over the next 24 hours, with Japanese policy makers expected to expand their already unprecedented support program and Europe to release results of the latest stress tests for banks. Investors will also get a first read on US gross domestic product in the second quarter later on Friday.

"There's been a reasonable amount of uncertainty as evidenced by the contrasting views in the market in the run-up to the meeting," Chris Green, the Auckland-based director of economics and strategy at First NZ Capital Group Ltd, said by phone, referring to the BOJ's gathering.

"There's increasing pressure to ease further from here. We're likely to see some sort of coordinated action between the BOJ and the government."

Japan releases a bunch of economic data ahead of the policy decision, with the CPI, industrial production and retail sales numbers out earlier on Friday to be followed by housing starts and vehicle production. Taiwan also reports on GDP, Australia issues data on producer prices, Singapore updates on money supply and Thailand reports on trade.

The dollar-denominated MSCI Asia Pacific Index added 0.1 per cent as of 10:03 am Tokyo time, even as about 160 stocks more stocks fell as rose. The gauge is on track for a weekly advance of 0.7 per cent, its third straight increase.

Japan's Topix index slipped 0.2 per cent, while Australia's S&P ASX 200 Index and the Kospi index in Seoul gained at least 0.1 per cent. New Zealand's S&P/NZX 50 Index rose 0.2 per cent, on track for a fifth straight weekly advance, its longest rally since April.

"Expectations are widespread that the BOJ will deliver a reasonably comprehensive easing, possibly including additional rate cuts and more quantitative easing," Cameron Bagrie, chief economist in Wellington at ANZ Bank New Zealand Ltd, said in a note to clients.

"Crucial to how the yen responds will be the response in bank stocks." S&P 500 Index futures were steady at 2,164 Friday, after the underlying stock measure added 0.2 per cent on Thursday, climbing to a level five points below its record.

The yen gained 0.9 per cent to 104.36 per dollar, after earlier reaching as strong as 103.41.

"There was no visible news, but markets are nervous ahead of the BOJ meeting," said Yuji Saito, Tokyo-based head of the foreign-exchange department at Credit Agricole SA, referring to the yen's move.

Overnight implied volatility for the dollar-yen - the world's second-most traded currency pair - climbed 40 percentage points on Thursday to 52.8 per cent, the highest level since 2008.

Prime Minister Shinzo Abe flagged a 28 trillion yen (S$360.5 billion) fiscal stimulus package on Wednesday, too be approved by Cabinet next week, increasing pressure on the BOJ to help revive output and inflation.

Four in five economists predict additional stimulus from the central bank on Friday - with an increase in purchases of exchange-traded funds the most likely option, followed by a deeper cut in the negative deposit rate.

Consumer prices excluding fresh food in japan dropped by 0.5 per cent in June from a year earlier, the Friday data showed, exceeding the 0.4 per cent decline projected by economists. Retail sales grew slightly less than was expected.

Oil was on track for its worst month in a year, with West Texas Intermediate crude down another 0.1 per cent to US$41.10 a barrel, its lowest level since April 19. Futures have slumped 7 per cent this week and 15 per cent in July.

Crude's decline gathered pace after US government data showed stockpiles of the commodity climbed for the first time since May last week, as output rose. Oil is nearing a 20 per cent drop levels reached in early June, a move that would characterise a bear market.

Gold for immediate delivery added 0.1 per cent to US$1,337.66 an ounce, after falling 0.3 per cent in the previous session. The precious metal has gained 1.1 per cent this week, and 1.2 per cent in the month.

Yields on 10-year and three-year Australian government bonds slipped to all-time lows, as rates on New Zealand notes due in a decade also fell, declining three basis points, or 0.03 percentage point, to 2.22 per cent.

Ten-year Treasury yields retreated by one basis point to 1.49 per cent, falling for the third time in four days, while rates on similar maturity Japanese debt declined one basis point to negative 0.28 per cent.

BLOOMBERG