Volkswacht Bodensee - Asian markets, yen drop ahead of key Bank of Japan decision

Regional investors are trading cautiously, even after a succession of record Wall Street highs fuelled by promising inflation data and a Federal Reserve prediction that it would cut rates this year.

Eyes are now on Tokyo, where the Japanese central bank is expected to take a fresh step away from its ultra-loose monetary policy by starting to slowly reduce its vast hoard of government bonds.

The BoJ has been considering its next move to normalise monetary policy after years of keeping borrowing costs at minuscule levels, most notably by lifting interest rates out of negative territory in March -- the first hike in 17 years.

Officials are not expected to lift rates Friday but the reduction of bond holdings -- known as quantitative tightening -- is seen as the next move, with the weakness of the yen also playing a role in discussions.

The Japanese currency is sitting just off the 34-year low against the dollar touched in April -- following a BoJ meeting -- that forced authorities to step into forex markets to provide support.

Shunsuke Kobayashi, chief economist of Mizuho Securities, told AFP that reducing bond holdings would help the BoJ trim its debt ahead of potential future rate hikes.

At the same time, the bank is facing "pressure from the prime minister's office to address the cheap yen", he said.

Hiroshi Namioka, of T&D Asset Management, said: "Doing nothing at all could become a push for further depreciation of the yen.

"This isn't a situation where the BoJ can just sit tight."

Equity traders are keeping a close eye on the announcement as any tightening would lift Japanese yields and push up rates, making assets more attractive to anyone looking for better returns.

In early business, Tokyo was marginally lower, while the yen was also slightly down against the dollar.

There were also losses in Hong Kong, Shanghai, Sydney, Singapore, Wellington, Manila and Jakarta, though Seoul and Taipei rose.

The BoJ announcement comes after the Fed this week lowered its forecasts for interest rates this year to one, from three predicted in March.

But while decision-makers see borrowing costs being higher in January than previously thought, analysts said optimism that prices were being brought under control provided support to equities. Markets are looking at two cuts before January.

The latest sign that was the case came on Thursday, with news that the producer price index dropped 0.2 percent in May, well down from the 0.5 percent rise seen the month before and off the 0.1 percent increase that had been forecast.

Meanwhile, several categories the Fed uses to calculate its favoured inflation gauge, the personal consumption expenditures price index, also softened.

"The latest data in hand nudges the door a little wider open for the Fed to begin making an interest rate cut later this year," Comerica Bank's Bill Adams said. Comercia sees the Fed cutting in September and December.

The euro remained under pressure as investors nervously awaited the snap French polls at the end of this month and start of July, which were called by President Emmanuel Macron after his party lost to the far-right in last weekend's EU elections.

The move has sparked a period of political uncertainty in Europe's second-biggest economy and came as other leading nations come to terms with the vote that saw a shift away from the centre across the bloc.

- Key figures around 0230 GMT -

Tokyo - Nikkei 225: FLAT at 38,709.02 (break)

Hong Kong - Hang Seng Index: DOWN 0.7 percent at 17,986.07

Shanghai - Composite: DOWN 0.4 percent at 3,017.92

Dollar/yen: UP at 157.25 yen from 157.03 yen on Thursday

Euro/dollar: DOWN at $1.0742 from $1.0746

Euro/pound: UP at 84.19 pence from 84.15 pence

Pound/dollar: DOWN at $1.2759 from $1.2766

West Texas Intermediate: DOWN 0.5 percent at $78.21 per barrel

Brent North Sea Crude: DOWN 0.4 percent at $82.41 per barrel

New York - Dow Jones: DOWN 0.2 percent at 38,647.10 (close)

London - FTSE 100: DOWN 0.6 percent at 8,163.67 (close)

-- Bloomberg News contributed to this story --

T.Egger--VB