By Kevin Buckland
TOKYO (Reuters) -The yen strengthened and Japanese government bond yields rose to fresh multi-year highs on Friday after the Bank of Japan hiked interest rates as expected and raised its inflation forecasts, reinforcing views it will push rates up again.
Japan's Nikkei share average shed early gains to end the day down 0.07% at 39,931.98. It entered the midday recess up 0.6%, with the BOJ's announcement coming shortly before the start of afternoon trading.
The yen rose as much as 0.8% to 154.845 per dollar following the policy decision, but pared gains to be at 155.56 as of 0742 GMT following Governor Kazuo Ueda's news conference, where he said that a rise in underlying inflation was "moderate" and the central bank wasn't "seriously behind the curve", suggesting no rush to tighten policy again.
The two-year JGB yield rose as much as 3 basis points (bps) to 0.725% at its highest point, a level last seen in October 2008, and last stood at 0.715%. The bond hadn't traded since Ueda's news conference.
Benchmark 10-year JGB futures ticked up 0.11 yen to 140.78 yen. Bond prices and yields move inversely.
"I expect the rate will be kept the same for at least the next six months," keeping the pace broadly the same with hikes so far this cycle, said Kota Suzuki, a strategist at Nomura Asset Management.
"The central bank will be a little more cautious from now on as it will carefully assess the economic situation and the impact of the interest rate hike."
The BOJ hiked short-term lending rates by a quarter point to 0.5%. The move had been already priced into money markets after central bank officials, including Governor Ueda, had clearly signalled earlier this month that policy tightening was on the table.
In its quarterly outlook report, the board raised its forecast for core consumer inflation to hit 2.4% in fiscal 2025 before slowing to 2.0% in 2026. In the previous projection made in October, it expected inflation to hit 1.9% in both fiscal 2025 and 2026.
The market is currently priced for one further quarter-point increase by year-end, likely in December.
"Looks like overseas investors took the Outlook Report as hawkish," said Shoki Omori, chief global desk strategist at Mizuho (NYSE:MFG) Securities.
"Rates trading (is) choppy. Yields are higher but trading volume isn't high."
Early gains in Japanese stocks came on the back of a 0.5% rise in the U.S. S&P 500 (SPX) overnight to mark its first closing record since Dec. 6.
The yen was supported by comments from U.S. President Donald Trump that he thought he could reach a trade deal with China and avoid additional tariffs.