Asian Market Update: Markets lack consensus on BoJ rate outlook - Markets lack consensus on BoJ rate hike: The JPY is soft across the board, Japanese bond prices on the short end of the curve (most sensitive to rate expectations) are in negative territory and the Nikkei is lower as traders brace themselves for a possible BoJ rate hike. The BoJ's same-day funding operation failed to slow the overnight call rate for 3rd consecutive day, as traders increased bets on a BoJ rate hike (Credit Suisse data shows that there is now a 61% chance that the Bank of Japan will hike rates based on rate swaps vs a 54% chance following last week's release of GDP data). Some analysts are suggesting that the BoJ may raise rates by only 12bps to reaffirm their commitment to price stability without affecting consumer demand too dramatically. - Japanese press on the BoJ decision: Nikkei news reports that some Bank of Japan members believe that rates should be raised due to their belief that last summer's fall in personal consumption was temporary (some say the fall in personal consumption was caused by unusually wet weather in the summer). However, BoJ members who oppose a rate hike cite weak wage and price growth. - Japanese personal consumption: Data from the prior session showed that Japan's January nationwide department store sales came in 0.0% m/m, which was the first time in 3 months that sales did not decline. Interesting to note that large Japanese retailer Seiyu last week said that it expects to report its first profit in 6 years in the current fiscal year. - Major Currencies: The AUD/USD recovered from a dip to $0.7850 but the market was reluctant to test $0.7900 ahead of the wage data and RBA Governor Stevens' testimony tomorrow. The Q4 wage price index is expected to rise by 1.0% q/q v a gain of 0.8% in Q3. In its most recent quarterly report, the RBA was cautious that wage growth would likely remain at above average levels. The Kiwi is lower against the USD on profit taking as the Kiwi is sitting near a 3-week high against the USD. The EUR hit a 6week high against the USD as "USD weakness" looks likely to be the dominating theme for the next few days. Some traders attributed the current USD weakness on a BBC report that the US have contingency plans for attacks on Iran, but the news was largely ignored by markets (most notably oil prices remained lower). - Asian Currencies: The Korean Won is tracking the weakness in the JPY and uncertainty over the BoJ rate decision. The Thai Baht is higher against the USD by more than 1% after the Bank of Thailand conveyed that it plans to issue bonds in order to reduce excessive liquidity in the banking system. - Equities: The Nikkei 225 is declining on profit taking as traders show caution ahead of tomorrow's BoJ rate decision. Losses on the Nikkei were led by banking shares (a Bank of Japan rate hike would be a positive for banks). Shares of Nissan Diesel Motors are expected to rise after its trading halt is lifted following Volvo agreement to buy the company for a 22% premium in a $1.1B transaction. The Nikkei's trend is expected to remain upward even if the Bank of Japan raises interest rates, although share prices might dip slightly right after any rate hike decision. The KOSPI is little changed. South Korean automakers are gaining as a Bank of Japan rate hike would add a competitive advantage to these companies. Gains in automakers are being offset by losses in banking shares which are declining on profit-taking. The ASX 200 index failed to rise above 6000 for the 3rd consecutive session. M&A related gains are being offset by declines in shares of Fosters and Virgin Blue following their weaker than expected profit reports. - Commodities: Crude oil is trading below the $59 on reports that the US Northeast may experience a warmer than average March and April. Oil traders are ignoring geopolitical tensions in Nigeria and Iran. Spot Gold is gaining and holding above the $675 level on USD weakness and geopolitical concerns.